Comparing bitcoin and stocks investment at similar level of risk.
This blog post deals with the following question: “how much could one earn over the past 5 years, if one invested in bitcoin, but attempted to have no more risk than while investing in stocks or equities of the developed countries (US, Europe, Japan, etc.)”
Many prospective owners or investors are wary of cryptocurrencies and their #1 or #2 comment usually is:
"Cryptocurrencies are just too risky."
They are right – but only partly. Cryptocurrencies are only risky, if you devote all or a substantial part of your portfolio to them. But, if you simply “dilute” the allocation to just 5%, 10%, or 15% of your portfolio, such an approach will suddenly start to make sense.
The following chart represents performance of a “diluted” investment of 1$ into bitcoin, compared to 100% investment in US, European and Japanese stocks. The level of allocation is variable has been established in such a way, that at any time investor could expect level of risk equal to long-term volatility of US stocks.
Over the past 5 years profits realized in bitcoin have been 5-9 times higher than for developed markets equities, while drawdowns have been similar. Please note, that bitcoin has experienced an 87% bear market in this time, which is as bad as one could expect. The volatility targetted strategy lost 21%. A typical bear market in US, European and Japanese stocks can result in as much as 40-50% losses.
Profits and risk of a “volatility targetted" bitcoin investment, compared to global stocks (Aug ’12 – Jul ’17)
Cumulative profits | Deepest recorded loss | |
Bitcoin | 499% | -21% |
US stocks | 97% | -13% |
European stocks | 56% | -25% |
Japanese stocks | 64% | -22% |
