Bitcoin's volatility and profitability coexist, how can investors allocate risk?

Since its inception 15 years ago, Bitcoin has become a globally recognized asset. As the first global digital payment method to receive widespread global adoption, Bitcoin is a global monetary instrument that can be transferred directly between any two people around the world in almost real time.

Bitcoin was the best performing asset from 2014 to 2023, and occupied the best performing position of the year for seven of these ten years. However, in the other three years, Bitcoin was also the worst performing asset, showing the ups and downs of this asset. Over that time, despite these ups and downs, Bitcoin achieved an average annualized return of 50% per year, far exceeding all major asset classes.

Photo Caption: Table: Bitcoin's Performance Compared to Other Selected Major Asset Classes

Bitcoin's volatility, that is, its tendency to fluctuate greatly and its frequent and long-term decline, poses risks and challenges to many investors. Since 2014, Bitcoin has experienced four declines of more than 50%.

Although Bitcoin quickly recovered within six months after one of these declines, the three biggest declines averaged about 80%. Patient investors eventually paid off in every case, but it took almost three years for Bitcoin's price to recover in three of the four major adjustments.

Image caption: The table shows Bitcoin's historic decline, including the start date, days until the market bottoms out, the number of days until the market recovers, the percentage of decline, and the 4-year forward return. The latter calculation assumes the cumulative total return of holding Bitcoin for 4 years starting each period of decline.

Given this history of extreme results, Bitcoin's relatively small allocation and regular rebalancing may help investors stay stable amid market pressures. While past performance doesn't guarantee future returns, it's important to recognize that Bitcoin may continue to show volatility in the future.

Bitcoin only appeared 15 years ago. This nascent nature has led to price fluctuations as market participants speculated about Bitcoin's possible role in the global economy and investment portfolios. This is similar to how newly formed companies are often viewed as more risky to invest than established companies.

However, as time goes on, Bitcoin will continue to strengthen its global position, and its volatility will decrease significantly. Although Bitcoin's volatility is still much higher than other major asset classes, such as stocks and bonds, Figure 3 shows that the volatility of the world's largest digital asset is steadily declining.

Figure 3: Bitcoin's Volatility Is Still High, But It's Declining

Photo Caption: One-year rolling volatility

Although Bitcoin is often associated with huge volatility, its volatility isn't actually unusual compared to some big tech stocks such as Nvidia, Tesla, and Meta.

Arguably more important than the volatility of Bitcoin alone is probably its impact on the overall volatility of the portfolio. Because Bitcoin is relatively less correlated with traditional assets such as stocks and bonds over a long-term time frame, the way it performs in an investment portfolio is unique.

In fact, Bitcoin allocations may actually have less impact on portfolio volatility than some individual equities of the same size. Under large allocations, Bitcoin's independent volatility may have a big impact on portfolio risk. However, at a more modest scale, Bitcoin's generally lower correlation tendency tends to provide a moderate diversification effect while opening up a novel source of return.

Still, investors must be aware of Bitcoin's massive volatility and be prepared to endure a long and potentially painful decline. That's why we think anyone considering investing in Bitcoin should understand their investment period, risk tolerance, and have clear investment goals.

Therefore, here, I will share with you BiyaPay, a multi-asset trading tool that can invest in both Bitcoin and USD/Hong Kong stocks. It supports exchanging BTC and USDT into fiat currencies such as US dollars and Hong Kong dollars, and withdrawing remittances to bank accounts or brokerage firms such as Jiaxin and Yingtou to invest. As shown in the picture, you can also keep an eye on changes in the market on BiyaPay and do a good job of risk control.

As for investment strategies, investors can also cope with short-term fluctuations by using common portfolio management methods such as dollar cost averaging, regular rebalancing, and maintaining a long-term investment perspective.

Investing in digital assets involves the risk of their extreme price volatility and possible loss, theft, or disclosure of private keys. The value of its share is closely related to acceptance, industry development, and changes in governance, and is easily affected by market sentiment.

Digital assets represent an emerging and rapidly growing industry, and the value of their share depends on how well they are accepted. Changes in the governance of the digital asset network may not receive sufficient support from users and miners, which may have a negative impact on the digital asset network's ability to grow and meet challenges.

Trust investments are associated with risks that may affect the value of trust shares, including large-scale sales, security threats such as data breaches and hacker attacks, negative speculators' sentiment, and competition from central banks' digital currencies and financial plans using blockchain technology.

Disruptions to the internet or digital asset network will affect the ability of digital assets to be transferred, which in turn affects their value. There is no guarantee that security procedures designed to protect trust assets will work as designed or succeed in protecting trust assets from all possible sources of theft, loss, or damage.

These are also risks that Bitcoin investors should consider.

Overall, as an innovative financial asset, Bitcoin's performance over the past 15 years has fully demonstrated its extreme volatility and unique market position. Despite significant price fluctuations and long-term market adjustments, Bitcoin has shown investment value and potential that cannot be ignored. For investors who can withstand high risk and have a long-term investment perspective, Bitcoin not only offers the possibility to diversify their portfolios, but also brings rewards beyond traditional asset classes.

Bitcoin investments, however, should not be determined by momentary market enthusiasm or past performance alone. As an investor, you should have a deep understanding of Bitcoin's market behavior, risk factors, and its potential role in the global economy.

I believe that in the future, as the digital currency industry continues to mature and the global regulatory environment improves, the market performance of Bitcoin and other digital assets will continue to receive more attention.