Bitcoin: Risk vs Reward

By November 10, 20214 minute read
Bitcoin: Risk vs Reward

Bitcoin continued its bull run in the crypto market, touching as high as $67,000 in the crypto market in October. According to experts, Bitcoin prices will soar to $80,000 by the end of this year, $250,000 by 2025, and a whopping $5 million by the end of this decade. 

“As Bitcoin continues to mature and increase in value, usability, age and trust, it will behave less like a growth stock and more like a gold-like store of value,” says Daniel Polotsky, creator of Bitcoin ATM network CoinFlip. While several experts are positive about Bitcoin’s future growth, others believe now is the ideal time to sell your bitcoins, saying that cryptocurrencies are only a speculative bubble that will inevitably burst.

While volatility is the primary driver of Bitcoin’s spectacular growth, it is also what makes the cryptocurrency a highly risky investment. Therefore, it’s critical to look at the crypto from a risk vs reward perspective to understand better if it will eventually be part of a new crypto asset class. Bitcoin has a range of risk and return characteristics, and investors should consider these factors before adding it to their investment portfolio. 

Are the risks worth the returns?

All cryptocurrencies, including Bitcoin, carry a higher risk than traditional investments like equities and bonds. Volatility, the measure of how much an asset’s price has moved up or down over time, is the primary driver of this risk. While there are other risks associated with Bitcoin investment, such as cyber-hacking, fraud, lack of regulation, over-reliance on technology, limited usage, and so on, the most significant risk is the one associated with Bitcoin’s returns per se.

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In this year itself, Bitcoin prices have experienced major swings. While BTC fell by more than half of its price to $30,000 in May, it is now trading above the $60,000 mark. Let us now look at some basic figures and stats to understand BTC’s risk versus return better profile. 

Price History

Bitcoin’s first prominent price increase occurred when the value of a single bitcoin grew from a fraction of a penny to $0.08 in 2010. Since then, it has undergone multiple rallies and crashes. The graph below depicts the remarkable rise in BTC prices over the last nine years, from less than $1 at the beginning to more than $65,000 in October 2021.

It’s worth noting here that these past price swings have largely been caused by investors and traders wagering on an ever-increasing price with little regard for facts. However, Bitcoin’s price performance is gradually evolving now. As cryptocurrencies get closer to mainstream adoption and more institutional investors enter the market, Bitcoin prices are skyrocketing. 

Source: Statista

Bitcoin versus other investments

Another factor to consider is how Bitcoin performs in relation to other assets. A $1,000 investment in Bitcoin in September 2014 has risen to more than $100,000 in April 2021, as seen in the chart below. Nowhere else can you find such incredibly high returns. While the same investment in Amazon (AMZN) would have grown to be valued at more than $10,000, it still falls short when compared to the magnitude of Bitcoin.

Source: Medium

Average returns

The average return is a simple mathematical average of a series of returns over a specified time period that is used to evaluate an asset’s historical performance. As illustrated in the chart below, Bitcoin’s 250-day average return varies dramatically over time. This suggests that Bitcoin’s performance is extremely volatile on an average basis. 

Source: Business Think

Volatility over the years

The moving average of Bitcoin is compared to the S&P 500, a stock market index, in the chart below. In simple terms, a moving average is a technical analysis tool that creates a regularly updated average price to smooth out the price data of an asset or stock. Despite the fact that Bitcoin has increased in value and mainstream acceptance over time, its volatility has not decreased. Risk has historically been significantly more steady than returns, as assessed by the standard deviation of returns.

Source: Medium

The bottom line

The graphs above show that despite Bitcoin having a high risk-to-reward ratio, it also has a lot more volatility than traditional assets. While this isn’t an exhaustive analysis of Bitcoin’s risk vs return, it does give a general idea of what Bitcoin prices will be in the future for the average investor. However, potential investors need to realize that while analyzing an asset’s historical performance is the most common way to assess its risks and returns. However, past price fluctuations aren’t always indicative of future performance.

Every investment carries its own set of risks; as a result, investors must conduct rigorous research before investing. This is especially true for a cryptocurrency like Bitcoin, which is notorious for its volatility. Before making an investment, it’s also crucial to examine one’s risk appetite. If you’re considering investing in Bitcoin, start right away with WazirX, India’s most trusted crypto exchange. 

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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