Bitcoin's Volatility: A Double-Edged Sword Driving High Returns Compared to Traditional Stocks

One common criticism of Bitcoin is its volatility. This concern has been around for over a decade. Let’s take a closer look at what this volatility really means.

Volatility is a way to measure how much returns can change. There are different methods to measure it, but one simple way is to look at the standard deviation of weekly returns. To understand this better, we can compare Bitcoin's weekly returns to those of the S&P 500.

Since 2020, Bitcoin has had at least one week where it dropped by -40%. It also had four weeks where the drop was greater than 20%. On the flip side, Bitcoin also saw one week with a gain over 30% and about a dozen weeks with gains above 20%. In contrast, the S&P 500 rarely experiences changes beyond a gain of 10% or a loss of -10%.

This makes sense since the S&P 500 is made up of 500 different stocks. But how does Bitcoin stack up against specific companies? Let’s compare it to Berkshire Hathaway’s class B shares (BRK-B).

Even against Berkshire, Bitcoin's volatility is noticeable. Berkshire has outperformed the S&P 500 with a return of 107% since 2020. It remains less volatile, which is impressive.

Now, let’s compare Bitcoin to Apple, which is a significant part of Berkshire’s portfolio. Apple’s weekly returns exceeded 10% three times. Since 2020, Apple has seen a return of 192%. That’s better than the S&P’s 76%, but still not close to Bitcoin’s remarkable 562%.

Next, let’s look at Bitcoin compared to Nvidia since 2020. Nvidia’s weekly returns exceeded 30% once, likely due to an earnings announcement in 2023. It also had more than two dozen instances where it changed by more than +10% or -10%. This volatility has contributed to Nvidia’s impressive performance of over 1800% since 2020. The pattern here is clear: more volatility often leads to higher returns.

Traditionally, finance experts have viewed volatility as a negative. But what if it’s actually beneficial? MicroStrategy is another stock that matches or even exceeds Bitcoin’s volatility. Since adopting a Bitcoin strategy in 2020, MicroStrategy's weekly returns have mirrored those of Bitcoin but with even greater swings.

For instance, in early 2021, MicroStrategy’s stock jumped from $69 to $127 in a single week, which is an over 80% gain. It also saw gains of more than 40% in 2024 during its recent surge. This is likely due to MicroStrategy’s strategy of borrowing money to buy Bitcoin.

MicroStrategy’s returns are essentially an amplified version of Bitcoin’s. Additionally, it has attracted investors looking for Bitcoin exposure without directly buying it, such as foreign sovereign wealth funds. While the introduction of ETFs may have reduced some of this interest, there’s still a demand that explains its current premium over net asset value (NAV).

In summary, volatility is a key feature of high-growth assets. Embracing this volatility is essential for understanding Bitcoin. Over time, as the market matures, Bitcoin’s volatility may decrease.