Chris’ note: Bitcoin investors continue to suffer brutal losses. So far this week, the cryptocurrency has fallen 5%. That’s left bitcoin down 70% since its all-time high last November.
Readers have told us they’re scared. It’s especially scary for newer investors. That’s why today, I’m sharing a Q&A with our head of research here at Legacy, Jack Kasprzak.
He recently sent Legacy staff an optimistic note on bitcoin. So I caught up with him on Zoom to hear more about his views on the crash – and how to handle it. As you’ll see, Jack has some interesting thoughts on bitcoin’s wild volatility.
Chris Lowe: You usually work in the background at Legacy. Your job is to help crypto investing expert Teeka Tiwari and the rest of our authors put out top quality research and recommendations to their subscribers.
But you recently shared some research on bitcoin (BTC) that I want to bring to Daily Cut readers’ attention.
Bitcoin has sunk 70% since its peak last November. That’s a deafening crash. What’s going on? And how should our readers handle it?
Jack: You have to grasp that this kind of volatility is the norm for bitcoin. It may not seem that way for folks who’ve recently begun to invest in crypto.
But in the 12 years bitcoin has been trading, buy-and-hold investors have had to endure 15 drawdowns – or peak-to-trough falls – of 30% or more. These drawdowns have been as steep as 84%, 85%, and 94%.
The average drawdown has been 59%.
This volatility scares a lot of people. But it shouldn’t. As Teeka puts it, it’s the “price of admission” to own a breakthrough technology early in its adoption phase – with the chance at life-changing profits.
Bitcoin’s long-term performance makes it worth putting up with all the chop. Over that same time, a buy-and-hold bitcoin investor could’ve turned $1,000 into $237 million.
You can see what I mean from this log scale chart of bitcoin. The stock charts you see of bitcoin on CNBC and the internet are typically in linear scale.
Log is better than linear for visualizing wide-ranging returns compactly.
Bitcoin started at basically zero and shot as high as $69,000.
The log chart helps you zoom out and appreciate that, despite all the volatility, the price has pretty steadily climbed over the long term.
Chris: Bitcoin is a “non-correlated” asset. That means it tends to move independently from stocks. But in the recent downdraft, it’s moved almost in lockstep with the tech-heavy Nasdaq index. Help us understand what’s happening.
Jack: You’re right. Bitcoin crashed right as tech stocks… and the broader market… entered a bear market.
Investors are rushing for the exits at once.
Many of them have leveraged positions. They’ve borrowed stocks from their brokers to ramp up their gains. And for collateral, they’re using stocks and cryptos they already own.
That works great in a bull market. But as assets plunge, so does the value of investors’ collateral. So they’re scrambling to raise cash to cover levered bets they made when the going was good.
And they’re dumping anything that’s “liquid” – or easy to trade back and forth. Bitcoin, Ethereum (ETH), and other cryptos are among the most liquid assets in the world.
The stock market closes in the afternoon and on weekends. Crypto, by contrast, trades freely 24/7, 365 days a year.
This has made bitcoin track the stock market right now.
Chris: So far, none of this seems particularly bullish for bitcoin. It’s highly volatile. And it’s crashed in lockstep with the more speculative part of the stock market. What’s the bull case?
Jack: As Teeka hammers on all the time, we’re still in the early stages of adoption.
There are about 100 million bitcoin users. That’s going by how many bitcoin wallets there are.
There are roughly 4 billion people with a smartphone. Each one of them is a potential bitcoin user.
And bitcoin is a great tool for folks who don’t have bank accounts or access to traditional finance. There are about 1.7 billion of these “unbanked” people worldwide. A billion of them have access to a smartphone.
Bitcoin allows users to transact directly with each other, without middlemen managing the exchange of funds… and taking their cut. You can send the crypto anywhere in the world for a fraction of the cost of an international bank transfer or a remittance service such as MoneyGram.
And you can custody your bitcoin safely in a digital wallet app on your phone.
With so many potential users and benefits to attract them, bitcoin adoption will soar – and the crypto’s price with it.
Chris: How should folks approach investing in bitcoin?
Jack: Start by thinking about how much risk you’re willing to tolerate. Say the average drawdown for bitcoin is about 50% a year. If you have a 5% allocation to bitcoin… and it goes down by 50%… that’s just a 2.5% drop in the value of your overall portfolio [since 2.5 is 50% of 5].
If that makes you uneasy, start investing with less. You have the luxury of adding at these low levels and seeing how your portfolio responds to the volatility. If you eventually want a 5% allocation to bitcoin, you can start with 1% and watch what that does to your portfolio. Then slowly increase the allocation.
That way you can get used to handling bitcoin’s volatility and gauge how comfortable you are with it.
Chris: Thanks, Jack. It’s great to have you share your insights with our readers.
Jack: You’re welcome. Any time.