2024 Returns and Volatility
Korok Ray
If Bitcoin is indeed an entirely new asset class, then we must compare its returns against other asset classes. Bitcoin returned over 113% in 2024, and eclipsed the other major asset classes. Based on ETF proxies, the S&P 500 (SPY) returned 23.7%, gold (GLD) returned 28.7%, government bonds (GOVT) returned -2.18%, and real estate (VNQ) returned -0.93%. In terms of returns, Bitcoin clearly beat the others.
But what about risk? Returns are not the whole picture. The other key dimension is risk. Traditional finance measures risk by volatility, namely, the fluctuation in the stock price. Calculating annual volatility is a transformation of daily volatility, which itself is the standard deviation of log returns of the asset. Rational, risk-averse investors will accept higher risk if it comes with greater returns.
As you can see, bitcoin, equities, gold, and bonds are roughly on the same linear trajectory, which starts in the lower left corner of the chart and goes up to the upper right corner. This is what economists call the “capital market line,” which maps out the extra amount of return needed to compensate for extra risk. Those four assets follow the same pattern: Greater risk requires a greater return. The only exception to the rule is real estate, which had a bad year (high risk, low returns). Last year was not the year to invest in real estate, since you could have done about the same with government bonds, with much less risk. Bitcoin, in this sense, is not breaking any rules. It is simply offering a new choice for investors seeking higher risk and higher returns.
The capital market line does not ask the more elemental question of “What is the right amount of risk investors should bear?” That is up to individual preferences. Historically, financial markets have always classified equities as risky and bonds as safe. But with bitcoin on the map, now equities seem safe relative to bitcoin. Another way to cast this chart is that traditional measures of returns compute only nominal returns, not real returns, i.e., returns after inflation. When factoring out the devaluation of the U.S. dollar, government bonds and real estate earn negative real returns.
Is volatility a problem?
For 2024 at least, the returns from Bitcoin exceeded the other assets so much that it forces an uncomfortable question: How much does volatility really matter? And to whom? And when?
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Again, the traditional assumption in financial markets is that investors are risk-averse, and therefore dislike volatility at all costs. But the question remains: At what price? If the investor has a long enough horizon, sacrificing return for volatility would be a mistake. Volatility should not matter in the long term. Said differently, volatility only matters in the short term because it could lead to a loss of capital if you sell. In the long term, the real loss of capital is an opportunity cost: the foregone returns from NOT investing in the highest-return asset. So, volatility is a feature, not a bug, for the long-term investor.
Value investors like Benjamin Graham, Warren Buffet, and Charles Brandes knew about the problem of using volatility to measure risk. Volatility ultimately doesn’t distinguish between directional movements in price. An asset with strong fundamentals whose price falls registers a high volatility, but that can be less risky for the investor because of a lower purchase price. This is as true for undervalued businesses as it was for bitcoin during the last bear market, when it dipped below $20,000.
There are, of course, some caveats in place. The new Trump administration has articulated a more favorable regulatory regime towards cryptocurrencies, and bitcoin’s drawdowns in down years can be high, upwards of -70% historically. But 2024 was the year to bear risk, and bitcoin’s return proves that thesis.