Cryptocurrencies such as Bitcoin and Ethereum had a strong correction after a streak of highs in 2021. But don’t be alarmed: this is normal behavior for these assets, where high volatility is inherent in the business.
With great returns come great volatilities
Big returns attract many investors, but beware of Dory’s syndrome: strong bullish movements followed by sharp declines are common in this type of asset.
In December 2013, Bitcoin rose 467% in one month, but, soon after, it went downhill and even lost 83% of its value. A similar move took place in 2017, when the price reached US$ 20,000, but fell sharply and only recovered from losses in December of last year.
A recent XP study shows that Bitcoin has an annualized return of 130%, and the S&P has 37%. On the other hand, the annualized volatility of Bitcoin is much higher than that of the indices:
In other words: the potential for a return is high, as is the chance of suffering large losses.
But what’s the advantage?
The analysis below shows the correlation between Bitcoin and more traditional assets looking back over the last 10 years. The closer to zero the value, means the smaller the ratio between the compared assets. If it gets to -1, the assets move in totally opposite relationships.
Looking only at the first column, we have the correlation between Bitcoin and other assets. You can see that the correlation is very low, right? This feature is very interesting to compose a portfolio, because it indicates that asset increases are linked to different reasons. In other words, an event that is catastrophic to your actions, for example, can be a boon to cryptos, keeping your wallet protected.
It is exactly this effect that we are looking for when we speak repeatedly here that it is very important to have a diversified investment portfolio.
As a writer, Richard is an advocate of blockchain technology and cryptocurrency in general. He writes about all things from cryptography to economics, with a focus on how it applies to cryptocurrencies. He is also passionate about writing about topics such as decentralization, open-sourced software development, and copyright law.
