Fidelity Investments, a renowned financial powerhouse managing a staggering $4.5 trillion in assets, has been emphasizing the growing significance of Bitcoin in the financial world. This emphasis was further reinforced by Fidelity’s Director of Global Macro, Jurrien Timmer, who released a risk-reward study featuring Bitcoin alongside various financial assets.
According to Timmer’s research, there is nothing like Bitcoin in terms of risk-reward ratio when it comes to cryptocurrencies. His claim that it is “in a different universe” may surprise some people, yet extensive data supports this argument.
It is essential to comprehend how financial organizations evaluate the risk and reward of various assets in the context of this research. Usually, to do this, annualized volatility and annualized return are crossed.
The average annual return that an investment makes over a given time period is known as the annualized return. Better long-term profitability is implied by higher yearly returns, but these returns are sometimes accompanied by higher risk.
Bitcoin is a unique asset in many ways. But according to Timmer’s analysis, what makes it unique is its exceptional risk-reward ratio. Timmer claims that the risk-reward ratio for Bitcoin is approximately 60% annualized return over 69 standard deviations for the annualized volatility.
To put this in context, Timmer’s analysis indicates that the stock market’s SPX is the second-best-performing asset. The return on SPX ranges from 16% to 26%, while the risk is between 18 and 24 standard deviations.
Even the highest-risk asset on the market, China, which has an annualized volatility between 25 to 28, only accrues negative returns in the 3-year period. Because of this, Bitcoin’s 69 standard deviation and 60% annualized return are extremely remarkable.
Many investors who have always thought of Bitcoin as an extremely risky and volatile asset may find this shocking. Timmer’s research, however, indicates that Bitcoin’s substantial rate of return on investment might more than offset its volatility.
Over the past 10 years, Bitcoin has exploded into the financial spotlight thanks to its decentralized structure and high return potential, which have made it a popular option for some investors.
The unique selling points of Bitcoin are its limited supply, safe blockchain technology, and capacity to function as a hedge against established financial institutions.
In contrast to conventional currencies, there is a limited supply of 21 million Bitcoins. Over time, the price of Bitcoin has steadily increased as a result of this restricted supply and rising demand.
Furthermore, security and transparency — features that are becoming more and more crucial in the digital age — are guaranteed by Bitcoin’s blockchain technology.
Despite the remarkable performance of Bitcoin, cryptocurrency investing carries some risks. The value of Bitcoin can change dramatically in a short amount of time due to the extreme volatility of the markets. But as Timmer’s research demonstrates, for certain investors, the possible rewards might exceed these dangers.