Put simply, volatility refers to how quickly and how much an asset’s price changes. As it measures the rapidity and level of price changes, volatility is often used to measure the risk of investing in an asset. Due to various factors, including the current low levels of regulation and smaller market size, cryptocurrencies are significantly more volatile than most other asset classes.
But is volatility bad?
Despite its typically negative portrayal, volatility isn’t necessarily a bad thing. In fact, it can be good for a portfolio as it creates the potential for massive upsides. If an asset goes up in value, it’s volatile to the upside. If it goes down in value, it’s volatile to the downside.
So, volatility isn’t necessarily a good or a bad thing. All that matters is whether it’s going in the right direction for you or not. For example, if you short an asset, you’ll want it to go down in value. You want an asset to be volatile as long as it’s going in the right direction.
What happens when you add BTC to a traditional stocks and bonds portfolio?
So, now let’s look at what happened when a group of investors tweaked their traditional global portfolio of stocks and bonds to include BTC at the start of 2013?
According to this study, adding 5% Bitcoin (BTC) to a 60:40 global portfolio (60% stocks, 40% bonds) increased returns by 2.5X for a 5% risk! So even if BTC suddenly went to zero, you’d only lose 5% of your assets. That’s a sizeable return for a relatively small risk.
Because it’s so volatile and has the potential to increase so aggressively, crypto can have a really profound positive effect on a portfolio at such a small exposure.
Cryptocurrency & volatility
Crypto’s higher level of volatility can, in part, explain the growing interest in cryptocurrency investments, as it enables investors to realize significant returns over relatively short periods.
The crypto market’s volatility will likely decrease over time due to market growth, wider adoption, and increased regulation.
