Astounding investment facts about Bitcoin

At Maerki Baumann, we have long since viewed Bitcoin as an important component of any traditional portfolio. The ability to increase a portfolio's risk-return profile through the addition of crypto is now well documented, and ever more investors are discovering this fact for themselves.

Anyone who examines and analyses Bitcoin more closely in an investment context uncovers further exciting findings. In this article, we present a number of surprising facts about investing in Bitcoin that are sure to astonish you.

Why you don’t want to miss out on the best Bitcoin days

The key to success on the financial markets often lies in remaining invested in the market for as long as possible. This is especially true when it comes to volatile and high-yielding asset classes such as cryptocurrencies, including Bitcoin. This is illustrated by an impressive investment fact: if an investor had failed to be invested continuously over the past decade and had only missed the 20 best-performing days, the cumulative return from Bitcoin would have been almost 25 times lower. Instead of an impressive US-dollar performance of 8,568%, the corresponding return would have stood at just 344%. This demonstrates just how crucial it is to be invested.

_{Source: Bloomberg}

Hodling and not trading is often the right strategy

After all, anyone who repeatedly experiences the ups and downs with Bitcoin may come up with the idea of wanting to utilise this high level of volatility for their own benefit. Wouldn’t it be great to sell your Bitcoin intermittently and then later buy it back at a lower price?

However, it isn’t so simple. Most traders fail with such a strategy, as the chances of enjoying success are low in the absence of a complex and costly quant strategy. In fact, it turns out that missing out on the days yielding the best returns in various time periods results in performance losses that are greater than the earnings that could be achieved by successfully avoiding the worst days.

As the following table reveals, the return was considerably lower in various periods when the best-performing days were missed. In the 2019 example, for instance, an annual return of 220% was generated with a pure hodling strategy. However, had it been possible to avoid the ten worst-performing days, the performance would have stood at 420%, meaning that a sophisticated quant strategy could have generated an outperformance of 200%.

In reality, very few investors have access to such a quant strategy, which can often only be implemented by well-connected, experienced and specialised hedge funds. Those who didn't get their market timing right and even missed the ten best-performing days during 2019 would have registered a loss of 45%. This fact underlines that the expected value of a strategy that focusses on missing the worst-performing days will actually prove detrimental for most investors in the long run.

_{Source: Checkonchain.com}

Bitcoin performance following major shock events

Due to its volatility, there is a constant debate among investors as to whether Bitcoin should be considered a risk investment (risk-on) or a safe haven (risk-off). According to one line of argument, it is Bitcoin’s high level of volatility that would rule out the latter being true. 

The view that Bitcoin should also be seen as a risk-off investment is based on its unique characteristics. As a decentralised network and non-state asset, Bitcoin is unaffected by traditional counterparty risks and its performance is not dependent on economic developments in individual countries. These characteristics mean that Bitcoin may potentially prove less prone to the effects of critical market risk factors, such as banking crises, sovereign debt problems, currency devaluations, geopolitical unrest and other political and economic risks.

As the table below shows, we have seen time and again in the past that Bitcoin initially reacts negatively in terms of price to various shock events – and sometimes dramatically so. This is because Bitcoin is an extremely liquid asset that is traded globally around the clock and can be sold quickly.

Interestingly, the price subsequently went on to stabilise once more within a few weeks or months of many of these events taking place. And, in some cases, the price even rose sharply above the price at the time at which the shock event occurred, as the positive impact of such disruptive events was able to strengthen Bitcoin’s fundamental data in the long run.

_{Source: Bloomberg}

Bitcoin’s realised volatility falls with each bull cycle

Historically, Bitcoin’s realised volatility during bull markets was always particularly high. Viewed over various cycles, however, a clear trend is emerging: Bitcoin’s realised volatility is falling with every bull market. The long-term trend thus points to decreasing volatility for Bitcoin.

In the 2017 bull market, Bitcoin’s three-month realised volatility still reached 110%. At the height of the 2021 bull market, this figure stood at approximately 70%. In the most recent uptrend, which ended with a new all-time high of around USD 73,000, volatility amounted to 55%. While this trend of declining volatility reduces the chances of generating extreme returns such as those observed in the past, it also means that Bitcoin is maturing as an asset class, both in terms of its size and acceptance.

An interesting volatility comparison

An interesting comparison can be drawn between the volatility of Bitcoin and the so-called “Magnificent 7”, including tech giants such as Microsoft and Nvidia. The latter, which has proven to be a favourite among investors in the past few months, has recently registered an enormous share price advance. What many don’t realise, however, is that this impressive performance has gone hand in hand with even greater volatility than that experienced by Bitcoin during the same period.

This disproves the widely held assumption that Bitcoin must inevitably be more volatile than large and established tech stocks. In fact, the comparison reveals that the equities of top companies can also be subject to extreme price fluctuations. For investors, this means that volatility is not something only associated with crypto assets. Instead, it can also be observed in well-known tech stocks that are held on a broad basis in traditional portfolios.

This also suggests that Bitcoin could become a more stable asset class as time passes, underlining the importance of a sound risk assessment, irrespective of whether the investment in question concerns stocks or digital assets.

Important legal information

_{This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. ­Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA). This publication is expressly not intended for persons domiciled in Germany or so-called U.S. persons.}
 

Editorial deadline: 14 October 2024

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