Bitcoin Outshines Traditional Investments Despite Higher Volatility

Bitcoin remains an exceptional asset to be classified since it has garnered attention because of its high risk and return on investment.

Despite being a relatively new asset class, Bitcoin has garnered attention for its high risk and return on investment. This article analyzes Bitcoin's ROI and compares it to more conventional investment styles regarding return, risk, and fluctuation of BTC. A decade's worth of ROI analysis showcases Bitcoin's unique means of growing and fluctuating compared to stocks, bonds, and commodities.

On average, Bitcoin delivered better returns per year than traditional investments as adoption and popularity soared in the last decade. For instance, Bitcoin yielded an annualized return of 671% since 2013, far higher than other traditional types of assets. In 2023, Bitcoin soared by 156% compared to the S&P 500’s 25% and U.S. bonds' 5% return.

Even high-yielding corporate bonds and commodities lagged behind Bitcoin with respective returns of 12% and -2%. However, Bitcoin's coefficients of variation for the same period remained noticeably higher than those of traditional asset classes, with annualized volatility often exceeding 200% in its early years of trading and ranging between 40% and 70% in the more recent period.

This high volatility in Bitcoin adds an extra risk that deters traditional investors, but it has provided better risk-adjusted returns compared to most assets in the past. Hence, measures like the Sortino Ratio, which consider the downside risk of return, have highlighted Bitcoin's enhanced performance over the years, indicating that these great returns have come at the right risk.

Data from Fidelity International reveals that Bitcoin's 5-year risk-adjusted returns surpassed traditional assets, reflecting investors’ compensation for assuming its inherent volatility.

Moreover, Bitcoin's drawdowns, or peak-to-trough declines, were steeper than most traditional assets over the last five years, with larger maximum drawdowns than equities and bonds. However, its realized monthly returns often exhibit a positive skew, driven by periodic surges yielding considerable gains. In contrast to individual stocks in the S&P 500, Bitcoin's 360-day realized volatility fell below certain high-profile securities, suggesting a gradual stability in the asset's performance over time.

Due to improved market access and regulatory developments, Bitcoin is becoming more appealing to institutional investors. Custodial solutions, like self-custody and third-party full custody, have provided investors with additional avenues for securely holding Bitcoin.

By addressing technology-related risks, institutional-grade custody options have enhanced security, considering that over $1.7 billion of assets were reportedly stolen in 2023 despite a 54% decrease in platform-related losses from the previous year.

Increased acceptance of exchange-traded products (ETPs) for Bitcoin has paved the way for easier, regulated exposure to the asset. Unlike self-custody, ETPs simplify entry for investors by integrating full-custody solutions managed by specialized custodians. The recent approval of Bitcoin spot ETFs in the U.S. is expected to further institutional involvement, potentially reducing volatility as market depth and liquidity expand.