As Volatility Falls, The Climb Continues: Bitcoin as a Global Reserve Asset (Part 2)
While Bitcoin has spent much of its life as a highly volatile asset, this summer, it’s begun to show promise at sustaining stability, leading to a stronger case for it being a global macro-hedge.
In my last post(which you can find here), I introduced you to the foundations of why I believe Bitcoin may become the world’s most reliable macro-hedge. In case you haven’t read that yet, just think of a macro-hedge as an asset that protects your investment portfolio(or your savings) during periods of extreme economic stress(recessions).
Up until this year, Bitcoin often experienced at least one period of 5% or more volatility per year, which contributed to the case against it being a reliable store of value (especially when said volatility occurred during a bear market).
This summer, however, Bitcoin’s been essentially as stable as its’ ever been.
As CoinDesk pointed out on September 28th, over this month in particular, Bitcoin has only fallen by 6% max, while Tesla, for example, has experienced an 18% price drop. If we then take those monthly statistics and zoom out to the year, we end up with the chart below, which I’ve pulled from CoinDesk Research.
As you can see, earlier on in 2020, especially in the thick of COVID19’s first wave, Bitcoin was extremely volatile. As the summer began, its average volatility entered a smoothing out pattern, which became more and more significant until July 1st, when it fell below Tesla’s, as the graph shows.
This month, by the numbers, Bitcoin’s yearly average volatility has fallen to 55%, where it’s largely stayed. While this may not seem to be anything to write home about, it’s important to consider the fact that per CoinDesk, Bitcoin’s implied volatility, which is the volatility that investors expect it to have four weeks ahead, is now at 44%. If you add in the fact that this is the lowest it’s been in two years, then it’s clear that something worth noting is occurring.
If this sort of trend can continue for the long term, then as the world continues to be in turmoil, Bitcoin’s case for becoming the best reserve asset ever will only get stronger.
Why you might wonder?
Think back to gold.
Until Bitcoin’s launch, it was the world’s most trusted reserve asset. National banks, investment firms, and investors of all shapes and sizes have poured money into gold since the modern financial markets came to be. Still, what many people don’t know is that gold‘s price tanked 70% from 1980 when the gold standard ended, to 1999, when it hit $250 an ounce.
Therefore, it was only in the last 20 years or so that gold began its meteoric rise to where it’s at today at $1871.52 per oz. Consequently, if you had bought even an ounce of gold back in 1999, you would have achieved 86.6% returns on your investment.
Still, when compared to Bitcoin from 2012–2020, gold pales in comparison as a store of value. For example, if you were lucky enough to buy a Bitcoin in 2012, when it was $9.35, then by today, you would’ve achieved 99% returns or almost 10x your initial investment. What this suggests to me is that over the long-term, it really does perform like an improved form of gold, i.e., “digital gold.”
To hammer that case home, it’s essential that we do consider forward-looking models or leading indicators, like the stock-to-flow model and others. Before getting there, however, let me leave you with one question.
Considering that 4–5% Bitcoin can result in a traditionally allocated portfolio (60% stocks 40% bonds, adjusted to include 4–5% Bitcoin) having 9–10% volatility, would you be willing to take that risk to earn higher returns than anything else can give you?
Let me know down below and remember that in the end, we’re all students and the only way to succeed in a space where everything’s moving a lightning speed is to have a growth mindset. Therefore as you read my content, don’t consider me as an expert, consider me as a student who’s learning alongside you and sharing my experiences. Finally, if you enjoyed this discussion or even just found it useful, let me know here or on Twitter.
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Disclaimer: None of this is meant to be financial advice. I’ve researched and worked in crypto since 2016 and I aim to merely educate people on the upsides and downsides of all sorts of projects and the market itself. Additionally, I’m a student just as all of us are. Therefore, my thoughts on projects evolve naturally over time as I learn more about them. Last but not least, none of these posts represent the thoughts of NBX unless otherwise stated and this includes all posts that preceded this one.
