Ecoinometrics - Investment horizon
June 23, 2021
Maybe you’ve just started to invest in Bitcoin since 2021. If that’s the case the past few months might have been a little rough, especially the last two months.
But when we are talking about investment horizons, a couple of months is really short.
So what’s a proper investment horizon for Bitcoin?
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This post-halving bull market started pretty well. From May 2020 to May 2021 Bitcoin’s growth trajectory was well ahead of the previous cycle.
For some time it even looked possible that we’d go straight to $300k per coin next fall.
But it is never that easy…
Take a strong bull market, throw in some Elon FUD and kick miners out of China. What you obtain is sentiment crashing and everyone who just just bought in the last three months getting ready to cash out like the Bitcoin network is going to disappear tomorrow.
Now 70 days after the all-time high and -55% lower you start to see people calling Bitcoin dead once more:
"Institutional investors never came."
“This was a pump and dump by Musk and Saylor.”
"It was all retail speculation fuelled by leverage."
"The top is in for this cycle."
And so on...
To that I'm saying: stop.
Take a step back.
This drawdown has lasted only 70 days… that’s short. Very short. I mean let's just look at Bitcoin's returns over different time horizons.
To start with the absurd, take one week. What kind of returns can you expect on a week-over-week basis?
Well, here is the time series of rolling one week returns for BTC. Each point is coloured based on the market cap (using the full 21 million supply) to give a sense of the evolution of the market value over time.
Right... Over any 7 days period you are about as likely to be up or down. Things are basically random, there is no rhyme or reason to how the market moves.
So what’s there to expect at this scale?
Nothing. There is nothing to expect from hodling Bitcoin for a week.
Of course, I don't expect you to be surprised by this result.
Let's move on to a longer time horizon, shall we? How about one month?
Take a look.
One week, one month, this is pretty much the same. Sure you can capture bigger moves by investing for a month. But it is hard to know if you'll finish up or down after 30 days.
So if you bought the top at $64k don’t complain that you are down 50% a couple of months later. This is the cost of doing business. This is why you don’t go full on stupid with leverage.
But what is the correct investment horizon then?
Maybe it is one year.
Yep, one year is a bit better already. Historically, most of the time, holding for a year would have put you in the green and often significantly on the upside.
So talking of holding periods in terms of years seems to be a proper order of magnitude.
But you know what is better than one year?
Even more time spent with positive returns and larger upsides captured.
But the ultimate duration is the scale of a full halving cycle i.e. four years.
See for yourself.
No one who has invested in Bitcoin with a time horizon of 4 years has ever lost money.
Is it magical? No.
Is it going to last forever? No.
Can you expect that this will hold true in the near future? Yes.
The reason is simple. If you are trading on short term horizons you are betting on changes in market sentiment, on specific news or specific short term dynamics. That’s hard.
But if you invest for the long term you are switching to betting on a macro trend. And things get much easier.
Elon Musk tweets about Bitcoin. Miners move out of China because of a regulatory crackdown. US senators talk about banning Bitcoin because of its energy consumption.
That’s noise. People will have forgotten about it in a year.
But the rise of Bitcoin as a digitally native store of value is a macro trend that is going to last for years.
Sure at some point adoption will be large and growth will slow down significantly. When that happens extracting good returns out of a buy and hold strategy will be more tough. But nothing indicates we are there yet.
Some macro trends continue for decades. Take decreasing bond yields. That one has been going on for something like 40 years… sure on any given year the yield might have moved up or down. But over longer periods of time it has been all down from double digits in the 80s to virtually 0% last year.
So my point is that there is an easy game to play here. Bet on the adoption of Bitcoin as a macro trend with a multi-year investment horizon.
If that’s your bet then the current price action is not an occasion to complain. It is an occasion to accumulate.
CME Bitcoin Derivatives
The CME Bitcoin futures have seen some pretty high volume coming in the past few days. The $30k region is sensitive so traders have been getting pretty anxious.
That being said, as of last week there is no significant change in the positions:
The smart money is adding very slightly to their long positions.
Looking in details it seems to be asset managers going back towards a net neutral position.
Retail traders haven’t decided to buy the dip yet, not a big surprise judging by the general mood in the market.
So nothing to write home about.
No changes either on the options side of things. Still 3 puts for every 2 calls which means options traders are in protective mode.
We have one more week before the June contract expires so maybe we’ll see changes after this is done.
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