To investors,
The best investors in the world have been thinking about volatility for decades. Charlie Munger once said “Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.” Peter Lynch said “The key to making money in stocks is not to get scared out of them.” And Peter Drucker said “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”
Even Sun Tzu got in the game when he said “In the midst of chaos, there is also opportunity.”
It is volatility that ultimately separates investors into two buckets — those who seek volatility and those who try to hide from it. There is no greater filter to understand how someone invests, what their goals are, and ultimately what their portfolio looks like.
Bitcoin has been the epitome of volatility since inception in 2009. The digital currency has appreciated by approximately 1,000,000% over the last decade and a half. The compound annual growth rate is nearly 100% in the same time period. Doubling your money annually for 15 years is insane. But those returns were littered with multiple drops in price of at least 80%. Bitcoin has not been for the faint of heart.
But here is the thing — bitcoin’s volatility has been drastically reduced in the last year. Bloomberg’s Eric Balchunas shows “the ratio of IBIT's 60-Day volatility to SPX. It was 5.7x more volatile a year ago, now it's barely over 1 (meaning about same volatility as US stocks).”
The hardcore bitcoiners don’t like this. They want the volatility. Many of them would rather massive moves up followed by drastic moves down. The chaos is a feature, not a bug, in their mind. But Balchunas poses an interesting question:
“Here is a thought experiment for the Moon Bois: would you rather have God candles (both directions) to get the occasional adrenaline hit OR…a slow climb with decreasing volatility that attracts big fish money and gives bitcoin a fighting chance to be used as a mainstream currency one day?”
This question is worth thinking about, because we are watching the transformation of bitcoin. The asset is evolving from contrarian to consensus right before our eyes. It is the only asset I know of that becomes less risky as it grows in market cap. The largest pools of capital can now allocate to bitcoin, both because it has reached critical mass and the volatility has subsided to a level that doesn’t scare investors looking to protect their assets.
Remember, there are two types of investors — those who seek volatility and those who hide from it. Bitcoin has crossed into a middle ground that is attractive to both groups in a weird way. Just like Goldilocks, bitcoin is not too volatile, not too static, but it is just right. And that means we will see bitcoin continue to push higher and it sucks more capital into the digital blackhole it has created via the newest store of value on the block.
As much fun as the volatility of the past has been, bitcoin is growing up. The adults of finance are knocking on the door because the asset has achieved certain properties that fit their criteria. And the bitcoin holders who showed up for the volatility will just have to live with slightly lower returns moving forward. But before you start crying, remember that bitcoin’s lower volatility still outperforms the archaic assets of traditional Wall Street.
Hope you all have a great day. I’ll talk to everyone Monday.
- Anthony Pompliano
Founder & CEO, Professional Capital Management
How Geopolitics Are Making Bitcoin Stronger
Polina Pompliano and Anthony Pompliano discuss what is going on with bitcoin, bitcoin treasury companies, impact of geopolitical conflicts, stock market, and a little behind the scenes of announcing a bitcoin treasury company.
Enjoy!
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