Bitcoin Volatility Guide: Trends And Insights For Investors

By Jay Jacobs

Decoding Bitcoin’s Volatility

Bitcoin has become a globally recognized asset since its emergence 15 years ago. Regarded as the first global digital payment method to gain broad global adoption, Bitcoin is a global monetary instrument that can be transferred directly between two people anywhere in the world, in near real-time. From 2014 to 2023, bitcoin was the best performing asset and held the top annual spot seven of those 10 years. But bitcoin was also the worst-performing asset in the other three years, demonstrating both the highs and lows of this asset. Over that time period, bitcoin still averaged a 50% annualized return through these ups and downs, outperforming every major asset class by a wide margin.

Figure 1: Bitcoin has had periods of high performance and periods of significant drawdowns

Caption: Table: Bitcoin performance compared with other select major asset classes

Click to enlarge

Bitcoin’s volatility – meaning its tendency to have big swings both up and down – as well as its frequent and prolonged drawdowns¹, present risks and challenges to many investors. Since 2014, bitcoin has experienced four drawdowns in excess of 50%. While one of these was followed by a quick, six-month recovery, the three largest drawdowns averaged an approximately 80% decline. Patient investors were ultimately rewarded in each case, but in three of the four major corrections, bitcoin’s price took nearly three years to recover.

Figure 2: Bitcoin’s history of big drawdowns and rebounds

Caption: Table featuring Bitcoin’s historical drawdowns, including start dates, days until market bottom, days until market recovery, drawdown percentages, and 4-year forward returns, where the latter calculates the cumulative total return assuming Bitcoin was held continuously for four years starting from the initiation of each drawdown period.

With a history of such extreme outcomes, relatively small allocations to bitcoin and regular rebalancing may help investors stay the course throughout market stress. And while past performance is no guarantee of future returns, it is important to recognize that bitcoin may continue to exhibit volatility in the future.

Bitcoin’s Volatility Then & Now

Bitcoin only came online 15 years ago. Such nascency breeds price volatility as market participants speculate about the role bitcoin may play in the global economy and in portfolios. This is similar to how a newly formed company is typically perceived as a riskier investment than a firmly established one.

But as time has passed and bitcoin has continued to solidify its global presence, its volatility has notably declined. While bitcoin is still much more volatile than other major asset classes, like equities and bonds, Figure 3 illustrates the steady decline in the volatility of the world’s largest digital asset.²

Figure 3: Bitcoin’s volatility is still high, but coming down

Rolling 1-year volatility

And while bitcoin is often associated with its immense volatility, it’s actually not an outlier when compared to certain mega cap tech stocks, like Nvidia, Tesla, and Meta, for example.

Figure 4: Bitcoin’s volatility vs. certain mega cap tech stocks

Rolling 1-year volatility

Bitcoin’s Volatility And Overall Portfolio Risk

Arguably more important than bitcoin’s standalone volatility is the impact it will have on a portfolio’s overall volatility. Because bitcoin has been relatively uncorrelated to traditional assets like stocks and bonds over long time horizons, the way that it has behaved in a portfolio is unique. In fact, a bitcoin allocation may actually have a smaller impact on portfolio volatility than similar-sized positions in certain individual stocks. With large allocations, bitcoin’s standalone volatility can have an outsized impact on portfolio risk. But at more modest sizes, bitcoin’s typically low correlation has tended to provide modest diversifying effects while tapping into a novel source of return.

Still, investors must be aware of bitcoin’s immense volatility and should be prepared to weather long and potentially painful drawdowns. That’s why we believe anyone considering investing in bitcoin should understand their time horizon, risk tolerance, and have clear investment objectives. Investors can also navigate near-term volatility by using common portfolio management methods such as dollar cost averaging, regular rebalancing, and maintaining a long-term investment horizon.

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¹ Source: Bloomberg as of April 29, 2024. Bitcoin volatility is approximately 47% vs. around 12% for gold and 10.2% for global equities. Volatility calculated as the rolling standard deviation of annualized daily returns.

² Based on bitcoin’s market cap of $1.2T, which accounts for greater than 50% of the total market cap of all cryptoassets excluding stablecoins (Source: The Tie, as of Apr. 30, 2024.

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This post originally appeared on the iShares Market Insights.