Bitcoin volatility guide: Trends & insights for investors

Jay Jacobs Jul 11, 2024 Commoditiy

KEY TAKEAWAYS

Bitcoin has exhibited strong performance in the past decade, but its long-term uptrend has been accompanied by immense volatility and large drawdowns along the way.
Bitcoin’s volatility remains elevated at 3.9 and 4.6 times that of gold and global equities, respectively. But bitcoin’s volatility has consistently declined alongside the industry’s maturation in recent years¹.
While bitcoin’s volatility is high in absolute terms, it’s in the same realm as many familiar investments, like certain mega cap tech stocks such as Nvidia, Tesla, and Meta.
Investors considering a bitcoin allocation should take a measured approach that not only considers the potential upside that could come from investing in bitcoin, but also its volatility and risks. Small allocations, regular rebalancing, and dollar cost averaging may help smooth out the ride.

DECODING BITCOIN’S VOLATILITY

Bitcoin has become a globally recognized asset since its emergence 15 years ago. Regarded as the first global digital payment method to gain broad global adoption, Bitcoin is a global monetary instrument that can be transferred directly between two people anywhere in the world, in near real-time. From 2014 to 2023, bitcoin was the best performing asset and held the top annual spot seven of those 10 years. But bitcoin was also the worst-performing asset in the other three years, demonstrating both the highs and lows of this asset. Over that time period, bitcoin still averaged a 50% annualized return through these ups and downs, outperforming every major asset class by a wide margin.

Figure 1: Bitcoin has had periods of high performance and periods of significant drawdowns

Caption:
Table: Bitcoin performance compared with other select major asset classes
2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	Cumulative return	Annualized return
SPX 15%	BTC 36%	BTC 120%	BTC 1,375%	AGG 0.3%	BTC 95%	BTC 305%	BTC 60%	CMT 20%	BTC 157%	BTC 5,591%	BTC 50%
AGG 5%	SPX –1%	HY 17%	EM 35%	HY 2%	SPX 31%	Gold 24%	SPX 31%	Gold 1%	SPX 27%	SPX 215%	SPX 12%
HY 2%	AGG 0.4%	EM 15%	SPX 21%	Gold –3%	EM 21%	SPX 17%	CMT 30%	HY –11%	HY 12%	Gold 58%	Gold 5%
EM 1%	HY –4%	CMT 14%	Gold 12%	SPX –5%	Gold 18%	EM 14%	HY 5%	AGG –12%	Gold 12%	HY 53%	HY 4%
Gold –3%	Gold –11%	SPX 14%	HY 7%	CMT –9%	HY 14%	AGG 7%	EM –0.4%	EM –18%	EM 9%	EM 39%	EM 3%
CMT –18%	EM –14%	Gold 7%	CMT 6%	EM –15%	CMT 10%	HY 7%	AGG –1%	SPX –19%	AGG 5%	AGG 19%	AGG 2%
BTC –58%	CMT –25%	AGG 2%	AGG 3%	BTC –74%	AGG 8%	CMT –3%	Gold –6%	BTC –64%	CMT –2%	CMT 10%	CMT 1%

Source: Bloomberg and BIackRock calculations, as of Apr. 30, 2024. Asset classes shown include major liquid asset classes available to US. investors. Bitcoin returns calculated using Bloomberg Bitcoin Spot Price. SPX is represented by the S&P 500 Index (TR). EM is represented by the Dow Jones Emerging Markets Index (TR). AGG is represented by S&P U.S. Aggregate Bond Index (TR). HY is represented by S&P U.S. High Yield Corporate Bond Index (TR). Gold returns calculated using the spot exchange rate of gold against the U.S. dollar index CMT is represented by Dow Jones Commodity Index (TR).

Past performance does not guarantee future results. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index Certain sectors and markets perform exceptionally well based on current market conditions and iShares and BIackRock Funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated. Index performance does not represent actual Fund performance. For actual fund performance, please visit www.ishares.com or www.blackrock.com.

Bitcoin’s volatility — meaning its tendency to have big swings both up and down — as well as its frequent and prolonged drawdowns, present risks and challenges to many investors. Since 2014, bitcoin has experienced four drawdowns in excess of 50%. While one of these was followed by a quick, six-month recovery, the three largest drawdowns averaged an approximately 80% decline. Patient investors were ultimately rewarded in each case, but in three of the four major corrections, bitcoin’s price took nearly three years to recover.

Figure 2: Bitcoin’s history of big drawdowns and rebounds

Caption:
Table featuring Bitcoin's historical drawdowns, including start dates, days until market bottom, days until market recovery, drawdown percentages, and 4-year forward returns, where the latter calculates the cumulative total return assuming Bitcoin was held continuously for four years starting from the initiation of each drawdown period.
Drawdown starts	Days until market bottom	Days until market recovery	Drawdown	4yr forward return
December 19, 2017	360	1071	–83%	172%
January 7, 2014	372	1085	–80%	1,072%
November 10, 2021	376	849	–77%	–
April 16, 2021	95	186	–53%	–
September 5, 2021	9	37	–31%	844%
January 5, 2017	6	47	–28%	3,080%
March 7, 2017	17	49	–25%	4,359%
June 7, 2017	37	54	–25%	1,171%
January 11, 2021	16	28	–23%	–
February 22, 2021	4	16	–18%	–

Source: Bloomberg Bitcoin Spot Price. Drawdowns calculated from daily returns. 4Yr Forward Return calculates the cumulative total return if bitcoin was held four years beginning at the start of each drawdown. Dashes in the 4Yr Forward Return column indicate that four years have not yet passed since the beginning of that drawdown. Past performance is not indicative of future results.

With a history of such extreme outcomes, relatively small allocations to bitcoin and regular rebalancing may help investors stay the course throughout market stress. And while past performance is no guarantee of future returns, it is important to recognize that bitcoin may continue to exhibit volatility in the future.

BITCOIN’S VOLATILITY THEN & NOW

Bitcoin only came online 15 years ago. Such nascency breeds price volatility as market participants speculate about the role bitcoin may play in the global economy and in portfolios. This is similar to how a newly formed company is typically perceived as a riskier investment than a firmly established one.

But as time has passed and bitcoin has continued to solidify its global presence, its volatility has notably declined. While bitcoin is still much more volatile than other major asset classes, like equities and bonds, Figure 3 illustrates the steady decline in the volatility of the world’s largest digital asset.²

Figure 3: Bitcoin’s volatility is still high, but coming down

Rolling 1-year volatility

Source: Bloomberg. Bitcoin represented by Bloomberg Bitcoin Spot Price, Gold represented by Bloomberg Gold Spot Price, ACWI IMI represented by the MSCI ACWI IMI Net Total Return USD Index, US Agg represented by Bloomberg US Agg Total Return Value Unhedged USD Index. Volatility Annualized using daily returns. For illustrative purposes only. Not meant to guarantee any future result or experience.

Chart description: Line chart depicting the rolling 1-year volatility of Bitcoin alongside gold, global equities, and U.S. bonds, illustrating Bitcoin's historically high but decreasing volatility relative to other major asset classes from December 2017 to April 2024.

And while bitcoin is often associated with its immense volatility, it’s actually not an outlier when compared to certain mega cap tech stocks, like Nvidia, Tesla, and Meta, for example.

Figure 4: Bitcoin’s volatility vs. certain mega cap tech stocks

Rolling 1-year volatility

Source: Bloomberg. Bitcoin represented by Bloomberg Bitcoin Spot Price volatility Annualized using daily returns. For illustrative purposes only. Not meant to guarantee any future result or experience. Any companies mentioned do not necessarily represent current or future holdings of any BlackRock products. For actual Fund holdings, please visit www.ishares.com.

Chart description: Line chart showing the rolling 1-year volatility of Bitcoin juxtaposed with select mega cap companies: NVDA (NVIDIA Corporation), META (Meta Platforms Inc.), and TSLA (Tesla Inc.), showing a convergence in volatility levels over time from January 2020 to March 2024.

BITCOIN’S VOLATILITY AND OVERALL PORTFOLIO RISK

Arguably more important than bitcoin’s standalone volatility is the impact it will have on a portfolio’s overall volatility. Because bitcoin has been relatively uncorrelated to traditional assets like stocks and bonds over long time horizons, the way that it has behaved in a portfolio is unique. In fact, a bitcoin allocation may actually have a smaller impact on portfolio volatility than similar-sized positions in certain individual stocks. With large allocations, bitcoin’s standalone volatility can have an outsized impact on portfolio risk. But at more modest sizes, bitcoin’s typically low correlation has tended to provide modest diversifying effects while tapping into a novel source of return.

Still, investors must be aware of bitcoin’s immense volatility and should be prepared to weather long and potentially painful drawdowns. That’s why we believe anyone considering investing in bitcoin should understand their time horizon, risk tolerance, and have clear investment objectives. Investors can also navigate near-term volatility by using common portfolio management methods such as dollar cost averaging, regular rebalancing, and maintaining a long-term investment horizon.

Jay Jacobs

U.S. Head of Thematic and Active ETFs at BlackRock

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Matt Kunke

Digital Asset Strategist

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