Bitcoin Investors Don’t Consider Volatility
Volatility is risk.
The fatal mistake investors make is that they look at bitcoin, cryptocurrency, or stock market performance in a vacuum, when they must always be viewed in context with risk.
This is a chart comparing 1-year volatility percentages across all investments (and I wouldn’t call cryptocurrency an “investment.” I call it gambling).
Crypto Is Way More Risky Than the Stock Market
How volatile is Bitcoin, and why does it matter?
We measure risk/volatility using standard deviation.
Over the past five years, the S&P 500 – a stock market bellwether – has delivered an average annual return of 11.5 percent, with a standard deviation of 11.25. That means that, in any given year, the S&P 500 has a 95 percent chance of returning between -11 percent and +34 percent.
Over the past five years, the Grayscale Bitcoin Investment Trust has delivered an average annual return of 60 percent, with a standard deviation of 81. That means that, in any given year, Grayscale’s Bitcoin fund has a 95 percent chance of returning between negative ~100 percent and +222 percent.
In any given year, you have a 95 percent probability of a return that could run the gamut from tripling the value of your Bitcoin investment to more or less losing it all.
Compare that to the likelihood of only an 11 percent loss in the stock market from year to year, with the possibility of a 34 percent return.
Las Vegas Offers Better Returns Than Bitcoin
A person is better off going to Las Vegas and gambling the same amount they’d otherwise put into Bitcoin, or any other cryptocurrency, at the craps table. Over the long term, the expected return would be only negative 1.41 percent.
And a craps dealer won’t lose his password:
We lost the $150 million in cryptocurrencies that we held for customers because our founder died and he was the only one with the passwords to the wallets. Welcome to the financial future! https://t.co/81auPh1lxZ
— Nathaniel Popper (@nathanielpopper) February 1, 2019
Your Cryptocurrency Could Be Worth Anything Tomorrow – or Nothing
Why on earth would anyone sell something in exchange for Bitcoin, when the value of that cryptocurrency literally changes moment to moment?
You might sell something for $9,000 in Bitcoin, and moments later, it’s worth $8,200.
Bitcoin fell 85 percent from after a ridiculous parabolic rise. In 2011, it fell 94 percent over five months.
For those who say it could also go higher, why take that risk?
The US Dollar’s volatility hovers around 1 percent. Bitcoin’s volatility has been 15 percent in just the last 60 days.
I’d rather sell something and know that the value of the dollar will remain roughly the same for quite some time.
Bitcoin is for suckers. Fight me.