From Volatility to Value: Key Takeaways from Bitcoin's 3Q Performance

Key Takeaways:

• Bitcoin as a "Zero to One" investment offers unique long-term growth potential.
  
  
• Compounding returns make "time in the market" more effective than "timing the market".
  
  
• Bitcoin's volatility is high, but its long-term growth rate makes it a compelling asset.

In his book Zero to One, Peter Thiel describes "Zero to One" moments as groundbreaking shifts that create something entirely new, reshaping industries and societies. These innovations, like the automobile, the internet, and more recently, wealth creation in Bitcoin, enable exponential growth that compounds over time.

Recently, Charlie Bilello posted two charts that visually help explain the compounding power behind Zero to One investments. Relating these two notions allows us to better see Bitcoin as a long-term investment strategy.

On the surface these charts present information you’ve most likely seen many times before. Buy and hold is better than trading every market move. 

At face value, this is true. When we catch big trends early, “time in” the market is more impactful than “timing” the market. Time in the market allows investors to take advantage of the power of compounding. It’s how wealth is built. Slow at first, then exponentially faster as time passes on.

Why 'Zero to One' Investments Like Bitcoin Matter

Consider these Zero to One moments from the 20th and 21st centuries: the airplane and automobile (early 1900s), antibiotics (1928), the television (1920s-30s), the creation of the transistor (1947), the Discovery of Structure DNA (1953), the invention of the Internet (1960s-90s), the personal computer (1970s-80s), and the iPhone (2007).

Wondering if Bitcoin's volatility is worth it? Let’s dive into how patience and compounding can transform investment portfolios.

Since its inception in 2009, Bitcoin has achieved a Compound Annual Growth Rate (CAGR – average growth rate over time) of around 218%, with recent years slowing to a CAGR of 55%.

Slowing growth is a natural part of the adoption process. Like other game-changing innovations, early investors taking on the most risk reap the biggest rewards. Mid- and late-cycle investors benefit, but not to the same degree, as the larger trend unfolds.

This is the importance of the median growth chart and Jesse Livermore’s quote:

“It never was my thinking that made the big money for me. It always was my sitting.”

You don’t have to be the first to uncover a major investment to benefit, but you do have to participate and stay on for a bulk of the ride. 

Below we can see how quickly CAGR and volatility normalize as adoption takes hold. For comparison sake, the S&P 500’s growth is between 8-10% per year.

Rather than focus on the return game, we should recognize the main point: consistently saving and having the ability to invest in assets with long term growth potential are what lead to wealth creation.

While you can see that most of Bitcoin’s extreme growth is likely behind it, plenty remains in front of it as adoption and maturity of the asset class is just getting starting. So, while you’re no longer likely to become “rich” overnight, Bitcoin still offers a compound growth rate unlike the S&P or most other investable assets.

We don’t know what Bitcoin’s returns will be in the future. Given, banks and governments are now adopting Bitcoin we can assume the growth rates, though declining, will likely land somewhere between its CAGR and annual volatility rates.

For example, The S&P 500 has had many ups and downs over the last 100 years, but looking at the chart you can clearly see the benefit of having a growth path in front of you. For investment cases where this is present, old highs tend to become support for new highs in the future.

Understanding Bitcoin’s Volatility and Growth Potential

You might be wondering what’s the value of CAGRs and volatility metrics if you can’t calculate them?

The good news is, Michael Saylor, one of the most prominent Bitcoin advocates has released his model to help investors better understand Bitcoin CAGR and volatility. His model is available for anyone to download and adjust to help individuals realize how to invest in Bitcoin for long-term growth.

Saylor’s base case is within the CAGR and volatility ranges we previously looked at. His expectation is that Bitcoin will grow at roughly 29% per year for the next 21 years.

His assumptions are in line with the last seven years (20% CAGR / 69% Volatility) and last 10 years (68.99% CAGR / 70% Volatility). So, it’s not unreasonable to see a growth rate in the range of 20 to 70% annually, with the understanding that the growth rate will likely decline as adoption continues.

This does not mean Bitcoin only goes up every year. This is a compound rate, so there will be down years and periods scattered in between.

In Bitcoin’s 15-year history there have been four bear markets. In those periods, the average drawdown was -84%. Owning Bitcoin during these times is painful, though rewarding well after the fact.

Saylor’s assumptions for Bitcoin’s growth follow the point highlighted in Bilello’s first chart. Make a reasonable investment and give it time to grow and compound… for years, not days or months.

The value investor case for owning Bitcoin is that it’s a Zero to One asset with decades of potential future growth ahead.

Embracing Risk at a Comfortable Level

Saylor’s expectation is that Bitcoin returns would almost triple that of the charts from Mr. Bilello, 29% vs. 11% compound annual growth rate (CAGR) over 21 years.

Given we are accustomed to the stock market compounding at a much lower rate of 7-11% annually, this should paint the picture of how important an investment Bitcoin is to a modern investor or business owner.

For the latter, we’re beginning to see a rising new trend. Business owners, like Saylor, putting assets on the balance sheet that can help store value in today’s difficult economic environment.

While stocks tend to be tamer, anyone investing in Bitcoin should expect to see larger swings as noted by its much higher volatility metrics. The level of volatility experienced in Bitcoin can be quite discomforting for investors, specifically those accustomed to traditional market fluctuations.

If we look at Bitcoin’s history in the same way we looked at the history of US stocks, we’ll see a very early but similar pattern. New highs beget new highs, even after periods of lull or turmoil.

New technologies are the basis for market and societal growth. The challenge is our impatience. We tend to give our investments too much attention, but not enough time to grow! That’s the moral hidden within the charts of holding periods and returns of US stocks.

So, if we believe in and focus on the growth opportunity ahead, then the percentage allocation and time in the market for Bitcoin will be more important than chasing the fluctuation of prices caused by news headlines.

This leads to one final point. When it comes to investing and building wealth, we must embrace risk!

However, we must remember to embrace risk at a level that allows us to comfortably sleep at night. Doing so can be rewarding years down the road.

Conclusion: Focus on the Growth Opportunity Ahead

As we look at Bitcoin's trajectory and its position in a world of evolving financial systems, it's clear that a small allocation to Bitcoin, with a long-term mindset, may be more impactful than chasing daily price movements. Like all investments, wealth-building through Bitcoin will have its ups and downs, but for those willing to embrace the volatility, the potential rewards could be substantial.

Ready to explore Bitcoin as a long-term investment? Let's connect to start building a diversified portfolio that leverages the power of compounding.