When purchasing bitcoins, are you aware of their volatility? Most world currencies seem to be tied to USD – the reserve currency, and BTC rate remains unpredictable.
Speculations, gains and losses are commonplace if you do business in the world of cryptocurrency.
How can you measure the risks associated with Bitcoin trading? In a recent interview to Investopedia, Bitcoin investor and venture capitalist Barry Silbert said he believes Bitcoin is among the most risky ones, but potentially the most profitable investments ever possible to make. But what makes him think that?
There have been two important events in the history of Bitcoin that seem to contradict Silbert’s thesis: in 2013, Bitcoin lost 61% of its value in one day. In 2014, an even worst 80% drop occurred. Unsurprisingly, investors having significant reserves of bitcoins rushed in panic to sell them, which resulted in the coming of Bitcoin “Black Tuesday”. But, considering these two events in isolation from the general Bitcoin trends may easily confuse the casual observer and push them to wrong conclusions.
According to Dr. Kevin Aretz of Manchester Business School, last year the average annual return for Bitcoin was about 106%, and its annual volatility is around 90%. The problem of assessing the expected return stems from the fact that we base ourselves on the single year data only, which is insufficient for making any final conclusions and judgments about the potential profitability. Bitcoin may have a fairly high potential because it is new, exciting, and therefore, it is very volatile. At the same time, the annual rate of return is hardly to exceed 50% ever again.
Bitcoin itself is very sensitive to the economic situation, and is likely to go down in recession, which, of course, makes it a rather risky asset.
Purchasing bitcoins for trading purposes being a risky kind of activity is an open secret, though. There have been a lot of successful and ruinous cases of amateur Bitcoin rate speculation so far, and the risk may well be the main driving force of the entire industry. Again, the question is, how can this risk be measured?
90% annual volatility is not something previously unheard of. Derivatives (futures, options, forwards, and swaps) are frequently associated with comparably high risks. Such volatility can even be found in the underlying assets.
Investments in derivatives, including call and put, or even more exotic types of options, are considered extremely risky, especially if you are taking short position on them (selling them to someone else) – usually that is exactly what commercial banks do with them. It is difficult to estimate the potential return, but expect this style of trading to get you 30-40% profit year annually. In other words, when purchasing Bitcoin, you take a high risk, with the potential profit expectation being rather high.
Thus, we arrive at the fact that, with all its riskiness, Bitcoin is at least capable of providing a certain reward potential. The willingness to accept its risks is one of the reasons why cryptocurrency rate is so volatile.
In other words, purchasing Bitcoins and making money on them is an option if you know how to choose the right time to enter and exit positions.