In Part I of this series, we looked at the value propositions that will drive the returns of crypto assets into the future. In this post, we will begin comparing crypto to traditional assets in terms of historical returns and volatility.
Through this analysis we will see that Bitcoin’s volatility isn’t too far outside the range of some well known stocks. Additionally, the returns that Bitcoin has yielded have been more than enough to compensate for the associated volatility.
The data used for this analysis is pulled from January 2014 to October 2019. Crypto data before 2014 is less useful for our analysis due to the low volume and lack of transparency. We will also exclusively use Bitcoin when comparing to traditional assets. This is due to Bitcoin having the most established history and volumes closer to that of traditional assets. The majority of other crypto assets were and are too thinly traded to be considered in this analysis.
However, Bitcoin works as a strong proxy for the crypto industry as a whole, with most crypto assets being highly correlated to the price movements of Bitcoin. This is similar to how the S&P is used as a proxy for equities.
The traditional assets we chose to include in the analysis were AMD, Facebook, S&P 500, and GLD.
The first piece of analysis focuses on the most commonly discussed metric: returns. Below is a chart showing the yearly returns for each of the assets from 1/1/2014 to 10/3/2019.
Bitcoin yielded the best returns, appreciating more than an order of magnitude over the last 5 years. AMD (the stock with one of the highest trade volumes) also posted a return of 626% over the same time frame.
Below is a graph depicting the value of the asset over 5 years assuming that $1000 was invested on 1/1/2014.
Even having gone through a significant bear market in 2015 and 2018, a buy and hold strategy with Bitcoin would have posted significantly better returns than the other investments in this analysis.
However, what level of volatility accompanied these returns?
Below is a chart showing the annualized volatility of each of the assets using daily returns.
The volatility stacks up closely to the returns, with the highest returning assets showing the most volatility (BTC & AMD).
Much of the volatility can be explained by the size of these assets. Below is a chart showing the market caps of each asset (gold does not include jewelry & industrial uses).
Therefore in the future we can expect Bitcoin’s volatility to drop as its market cap and liquidity rise. As Bitcoin matures, it will still exhibit characteristics consistent with the hype cycle common amongst new technologies, however its volatility should trend downward as it becomes more established and better understood.
Given the returns and the volatility, how does Bitcoin’s Sharpe Ratio stack up against traditional assets?
The chart below is a more encompassing view of traditional assets, and we can see that Bitcoin’s risk adjusted returns are strong when compared to the traditional asset classes.
The intention of this analysis was to put Bitcoin’s volatility into perspective given its returns, relative to traditional assets. As we have seen, Bitcoin’s outsized returns have more than compensated for its volatility.
The next article will dig deeper into the correlations between Bitcoin and traditional assets.
Disclaimer: The views expressed in this article are solely opinions of the author and do not represent financial or legal advice whether to buy, sell or hold shares of a particular cryptocurrency, cryptographic asset, stock or other investment vehicle. Prior to trading, investing or purchasing any assets, individuals should consult with their own tax, financial or legal advisor. Past performance is no guarantee of future price appreciation.