When investing in the financial markets, people often underestimate the possibility that, over time, the investment may lose its value, and recovery of temporary losses will take time. The deeper the damage, the more energy is needed to compensate for the loss. If I invest $100 and lose 10%, I get $90 (whether I keep the investment or liquidate it). So, what return do I have to pay to go back to $100? I have to earn 11%, because with a base of $90, if I make 10%, I end up with $99. This effect is amplified if I lose 20% – to get back from $80 to $100, I have to make 25%.
Therefore, the losses are not exactly symmetrical to the gains you must make to recover. If I lose 50% of my investment, to get back $50 to $100, I would have to double it, so it should be intuitive to the reader that the more the loss is amplified, the more energy is recovered. is required to do.
The bad news is that Bitcoin (BTC) has lost over 90% of its value at one time, with more than 80% on two other occasions, with the performance percentage reaching -75% during this period. But the good news is that it has always (at least so far) recovered from losses in a very reasonable time frame – even the heaviest losses.
related: Bitcoin Price Forecasting Using Quantitative Models, Part 2
The Ulcer Index, that is, the index created by Peter Martin that calculates how long an asset has been below its previous high, is crystal clear. Investing in bitcoins ulcers many months, but then leads to incredible returns, forgetting the period of stomach pain from losses if one has the patience to wait.
Compared to the previous two graphs, which cover a period of 50 years, while this only covers 12 years, the presence of a loss zone is prominent, although in reality, bitcoin has always yielded incredibly high returns. which allowed it to be recovered. Up to 900% in less than two years.
Returning to the topic of this post, here are some more methodology notes:
- The digital asset in question is bitcoin;
- The comparison currency used is the US dollar;
- The frequency of analysis is daily; And
- The period is from 23 July 2010 to 16 June 2022, the day the analysis was performed.
Although bitcoin’s history is very recent, its volatility and speed of loss recovery are remarkable, an indication that the asset may be more fully explored and understood before deciding to include it in a diversified portfolio.
As you can see from the length of the table above, in just 12 years of history, there have been multiple periods of loss and recovery of over 20%.
It is widely believed that one year in crypto corresponds to five in traditional markets. This is because on average the movement of ups and downs is five times better than that of stocks. Based on this assumption, knowing that the period under consideration is short, we can try to compare it with a 50-year analysis of the markets.
As can be seen, the number of days it takes for a loss of 40% or more is often less than three months. The dark dot is the current decline faced by bitcoin since its November high, or about 220 days so far, which makes it correspond to a regression line that determines the average value of the relationship between the loss and the time to get there (simplifying for). ,
While an asset reaching a low point in a short period of time means that it has a lot of volatility, it also means that it is capable of recovering. Otherwise, it would not have recovered from that lower level and, in fact, would not have even a bottom to rise above.
Instead, shrewd investors who were initially skeptical of bitcoin until it was proven to rise again in the period of the onset of COVID-19 (ie March-April 2020), realized that the asset had There are unique and interesting features, not the least of which is its potential. To overcome the lows.
This means not only a market, but a market that believes (albeit still with an imperfect model) that bitcoin has a fair value value and therefore, at certain prices, it is a bargain to buy.
Therefore, understanding the strength of bitcoin’s recovery can give us an estimate of how long it might take to reach new highs – don’t confuse yourself into thinking it might do so in a few months. (Although, on a few occasions, this has surprised everyone), but to give us the peace of mind not to wait to invest already, or to understand the opportunity ahead, if by now, we will be able to invest. I’m hesitant.
From the graph above, a regression can be drawn that shows the relationship of bitcoin to the time it took to recover from the relative low to a new high. To give an example, assuming that bitcoin has hit a low of around $17,000, assume that a recovery of 227% is needed to bring it back to highs. So, the following formula can be obtained from the regression line described in the graph:
Where G is the expected day to recover the loss and P is the required recovery percentage, it can be estimated that it takes 214 days to return to a new high from a week ago low.
Of course, assuming that the low has already been hit is a stretch since no one can really know. However, it can be assumed that new highs are unlikely to be seen again before January 2023, so people can rest their hearts if they have invested and are suffering losses, while those who may not have invested yet. They can realize that there is a very interesting opportunity in front of them to consider and quickly.
related: Bitcoin Price Forecasting Using Quantitative Models, Part 3
I realize these statements are strong. They are not meant for forecasting, but only for analyzing the market and its structure, trying to give the investor as much information as possible. Obviously, it is necessary to estimate that the more damage is done, the more I have to be prepared to wait for it to recover, as can be seen from the graph below, which is the regression in the graph above. (Recovery on a loss basis times) relating to the loss incurred.
- The analysis reported here represents an estimate based on historical data; There is no guarantee that the market will recover within or around the predicted values.
- There is no assumption that would establish the current loss as short term.
- Not selling does not mean that the loss is not real; The loss is such even if the underlying asset is not sold. It is not realized but it is still real, and the market will have to make a recovery in line with the graph at the beginning of this analysis to recover the initial price.
Unlike the two asset classes equities and bonds, in the case of bitcoin at this point of loss, an exit represents more of a risk than an opportunity, as bitcoin has shown that it is much faster than those other two asset classes. might be fine. An earlier exit would have been necessary, as we did with the alternative digital asset fund, which is losing YTD of less than 20% and thus a ridiculous 25% to return to new highs for the year compared to 227%. would be required. What Bitcoin needs to climb back up is proof that using trend-following logic reduces volatility and recovery times.
However, to reiterate the difference between bitcoin and the other two asset classes (equities and bonds), I have compared all three on this graph of the relationship between losses and recovery times:
It is clear from this chart that bitcoin has an impressive recovery characteristic compared to equities and bonds, so the percentage of bitcoin in a portfolio, even a small percentage, can speed up the recovery time of the entire portfolio.
This is probably the best reason to have a percentage of digital assets in a portfolio, preferably through an actively managed quantitative fund, but you already know this because I see conflicts of interest.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Daniel Bernardik Is a serial entrepreneur who is constantly on the lookout for innovation. He is the founder of Diemon, a group dedicated to the development of profitable investment strategies, which recently successfully issued a digital currency, the PHI token, with the goal of merging traditional finance with crypto assets. Bernardi’s work is oriented toward the development of mathematical models that simplify the decision-making processes of investors and family offices for risk reduction. Bernardi is also the chairman of investor magazine Italia Srl and Dymon Tech Srl and CEO of asset management firm Dymon Partners. In addition, he is the manager of a crypto hedge fund. He . is the author of Origin of crypto assets, a book about crypto assets. He was recognized as an “inventor” by the European Patent Office for his European and Russian patents related to the mobile payments sector.