With the holiday season approaching, it’s a good time for us to prepare ourselves for some Bitcoin table-talk. People outside of the crypto industry often associate Bitcoin with high-risks and volatility, so much so that it deters them from even researching the topic or considering Bitcoin as an asset suitable for investment. In this article, we will compare Bitcoin with other popular tech stocks and show how Bitcoin may not have necessarily been “riskier” than other comparable investments in the tech sector.
How Does Bitcoin Compare With Other Popular Tech Stocks In Terms of Daily Drawdowns?
Looking at the past six and 12 months, we summarize the frequencies of the value of Bitcoin and other popular tech stocks (SMART, FAANG, Tesla) drawing down a minimum of -2.5% and -5.0% at the daily close (for Bitcoin, the “daily close” is defined as 00:00 UTC):
Frequencies of Bitcoin & Tech Stocks Drawing Down sub -2.5% & -5.0%
When compared with blue-chip tech stocks like FAANG, Bitcoin does appear to be riskier, with higher frequencies of reaching a daily minimum drawdown of -2.5% and -5.0%.
However, when compared with other popular tech stocks like SMART and Tesla, using this metric, the data shows that Bitcoin has not been significantly riskier. In the past 6 months, Bitcoin had a lower number of 2.5% and 5% daily drawdowns than Tesla and SMART stocks.
Next, we compare the absolute drawdowns of these assets. This shows the maximum unrealized loss if one bought the asset at the highest point and held it to the lowest point — in simpler terms, drawdown refers to the biggest decrease in value of an asset from the high.
The maximum drawdown for Bitcoin and tech stocks for the past six months and 12 months are as follows:
From this perspective, looking at the data from the past 12 months, Bitcoin appears to be riskier than FAANG but has similar maximum drawdown levels as SMART and Tesla.
However, for the past six months, Bitcoin’s drawdown has been on par with the average of FAANG and appears to be less than that of Tesla and the average of SMART.
With this data in mind, if your family and friends are already comfortable in investing in these tech stocks, they should not be deterred by the “risk and volatility” of Bitcoin!
Use a Dollar-Cost-Average (DCA) Strategy to Reduce the Impact of Volatility on your Investment
Dollar-cost-averaging, or DCA, is a strategy that involves the periodic purchase of an asset using the same dollar value over time, as opposed to a lump-sum purchase. For example, if Alice decides to invest a total of $26,000 into Bitcoin, she can make the whole investment at once. However, if she is concerned that short term market movements will impact the value of her investment, she can invest $500 every Monday for 52 consecutive weeks. The key to this strategy is committing to purchasing a fixed dollar sum at a fixed interval, regardless of price!
The following chart shows the result of the DCA strategy if Alice had started buying Bitcoin 52 weeks ago on Nov 18, 2019, using a fixed quantum of $500 each week:
This strategy has long been advocated by investing legend Warren Buffett for navigating volatile markets. It reduces the exposure of short-term price risk of entering at the “wrong time” for an asset that has long-term appreciation potential. Timing the market is a difficult, if not impossible, task and it’s too time-consuming to study the short-term market movements for most investors. This is where a DCA strategy can help investors avoid missing out on investing in an asset which has high short term price volatility but great long term value-appreciation potential.
Following the above example, while Alice may be buying into Bitcoin at higher prices for some weeks (e.g. investing on Feb. 10, 2020 at $9,850 per BTC), in the other weeks she will be investing at lower prices ($5,033 on Mar. 16 2020).
Overall, employing a DCA strategy over the past 52 Mondays would have generated a return of 71.6%, a total investment of $26,000 would have a current value of about $44,600, representing capital gains of around $18,600. This strategy outperformed holding the same $26,000 in either S&P 500 or Nasdaq 100 for a year by about 57% and 28% respectively!
What if Alice had started using this strategy ($500 per Monday) since Bitcoin’s historical high in December 2017 (Bitcoin trading at $19,000+)? It would have been the worst time to invest in Bitcoin, but with a DCA strategy, the results would be somewhat favorable:
Alice’s total investment would be $76,000, and her portfolio’s current value would be about $161,240 (a return of around 121%, with capital gains of about $85,240 over 152 weeks). This would have grossly outperformed holding S&P 500 or Nasdaq 100 for the same period by around 80% and 31% respectively.
Comparing Volatility Data With Other Traditional Assets
(For those who are more finance savvy)
Based on a rolling 30-day realized volatility in the past six months, our data shows that tech stocks like Tesla and SMART have been more volatile than Bitcoin since around the end of June 2020. During this six-month period, data shows that Tesla and SMART have over 100 and 88 days where their rolling 30-day volatility is higher than Bitcoin.
So, if your family and friends are comfortable in investing, or have invested, in these stocks, they should not shy away from Bitcoin!
Hopefully, this article will help you allay the many misconceptions of Bitcoin being “too risky” and get your close ones to start researching!
(All data as of Nov. 9, 2020)