Bitcoin’s Drawdowns: From Capitulation, Opportunity

As Bitcoin has matured over the years, it has experienced numerous, severe drawdowns, such as the one we are currently witnessing. In every such occasion, Bitcoin has recovered, gone on to set a new all-time highs and deliver incredible returns to the steadfast investors who held on for dear life. This is not a phenomenon unique to Bitcoin, it is a time-tested lesson for investors of all risk assets. It was Warren Buffet, (ironically a huge Bitcoin critic) who said “be fearful when others are greedy and greedy when others are fearful” to articulate contrarianism, and the importance of the old-fashioned “buy the dip” strategy. More often than not, courageous investors who are willing to step in and buy in a sea of red are rewarded over the long term.

Examining the worst drawdowns in Bitcoin’s history, those in excess of 80% from an all-time high, makes this lesson apparent. From each trough, Bitcoin has delivered over 100% compound annual returns to date! Additionally, the drawdowns (peak to trough) lasted 207 days on average and took only 449 days from the bottom to reach a new all-time high! This should provide comfort to long term investors with 5-to-10-year investment horizons. Additional observations can be made when analyzing the cause of each selloff. In its early days, Bitcoin’s market crashes were a result of existential crises, hacks, and attempted bans, not necessarily investor sentiment. In recent history, the opposite appears to be true, Bitcoin tends to sell off with other risk assets in response to economic uncertainty and central bank activity. Bottom line, no matter the cause of Bitcoin’s future drawdown, it’s *probably* safe to say that Bitcoin has been through worse.

Now, a few caveats. Past performance is not indicative of future results. We cannot make assumptions about how quickly Bitcoin will recover from its current rout based on its history. These are simply observations. Secondly, these returns are hypothetical. Timing a market bottom is nearly impossible. Market bottoms are only knowable in hindsight. Investors would be well off to avoid attempting to sell on the way down with the intention of “buying the bottom”. Rather, they should stay invested, avoid participating in capitulation, and accumulate when the market is at its most irrational.

Based on these observations, one could argue, that, over a long enough time horizon there may be more upside risk than downside. In other words, it may be riskier to miss these opportunities than to buy a dip “that keeps dipping”.

Viridi Research

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