Why Bitcoin Volatility Doesn’t Matter Much in the Grand Scheme of Things
Bitcoin volatility is one of the main concerns for many investors, but it doesn’t have to be. Quite the opposite: A well-managed portfolio can benefit from high volatility.
Bitcoin is approaching the $60,000 mark. Everyone who had predicted that valuation a year ago was called crazy. But 2021 isn’t 2020, and a lot has changed.
One thing that has changed is Bitcoin’s standing among traditional investors. And rightly so: 2020 was a stress test for Bitcoin and the entire digital asset class. Test passed; Bitcoin was best in class! Most other assets haven’t done as well as Bitcoin in 2020.
Looking back: Bitcoin’s comeback was no surprise.
When financial markets were in free fall in mid-March, Bitcoin was among the assets that dropped the most. More than 50 percent in a single day. At the time, we wrote here on our blog that the massive sell-off had primarily to do with the run for liquidity, not much with the growth prospects of the asset itself. As Bitcoin is one of the easiest portfolio-assets to liquidate, that’s exactly what happened: Investors mercilessly sold off every liquid asset they had.
We considered that a massive buying opportunity at the time, and those who listened have been laughing all the way to the bank. The Bitcoin investment theme, then and now, is a bet on technological adoption; a liquidity crisis doesn’t do anything to change that.
And here we are, 12 months later: Bitcoin has again turned out as one of the best-performing assets of 2020, just like it already was in the years before. From today’s point of view, the price drop in March 2020 is barely even noticeable.
In hindsight, everything is 20/20. What about the future?
Bitcoin is a volatile asset. However, volatility has two sides and what goes down may come up again – at least in the case of Bitcoin that has been true so far. What’s particularly interesting is that since the outbreak of the recession, Bitcoin has outperformed other risk-on assets.
Even more important: Bitcoin has also outperformed other risk-on assets over the previous five years – significantly! Looking at the Sharpe Ratio (a popular financial metric for an asset’s return compared to its risk), Bitcoin has had a superior risk-return relation. That means the overall portfolio return increases without over proportionally increasing the portfolio risk. Of course, volatility will increase as well, but investors who are in for the long run can live with that, as long as the long-term trend is going up.
We have no reason to believe that the uptrend is not going to continue. More and more people get into the digital asset space, and Bitcoin’s performance figures are too good for institutional investors to ignore. As the trend continues, temporary price swings don’t matter much.
And with the proper portfolio management, Bitcoin’s volatility can even generate excess returns, as active strategies have a greater opportunity to outperform the market return when volatility is higher. That’s what INVAO’s Managed Accounts are all about, giving investors the tools and strategies they need to maximize their portfolio returns. It worked in the year of crisis, and it will also work once the economy jumps back. We’re in for a good ride, a bumpy one, but a profitable one.
For more information about INVAO’s Managed Digital Assets Accounts, please visit www.invao.org.