Not all investments lose value equally: A recovery period for digital assets

People often underestimate the risk of losing their investment in financial markets. It may take time to recover any temporary losses. The greater the loss, the more energy is required to recover it. If I lose 10% on $100 of my investment, I will end up with $90. This is regardless of whether I liquidate the investment or keep it. What returns should I make to return $100? With a $90 base, 11% is required. If I make 10%, it will give me $99. If I lose 20%, this effect will be magnified. To get my $80 back to $100, I’ll need to make 25%.

The losses you face are not always symmetrical with the gains you make in order to recover them. To get $100 back from $50, I would need to lose 50% of my investment. It should be obvious to the reader that the greater the loss, the greater the energy required to recover.

Unfortunately, Bitcoin (BTC), which has experienced a loss of more than 90% on one occasion and more than 80% on the other two occasions, has a performance percentage that is -75%. The good news is that Bitcoin (BTC) has recovered from all losses, even the most severe ones, in a reasonable timeframe.

Related: Part 2 of Forecasting Bitcoin’s price using quantitative models

The Ulcer Index, which is the index that determines how long an asset has been lower than its previous high, was created by Peter Martin. It is a clear indicator. Bitcoin investing can lead to ulcers over many months. However, it also leads to amazing returns that, if one is patient enough to wait, will make up for the time lost in bellyaches.

Comparable to the two previous graphs which cover a period 50 years and this one covers 12 years, Bitcoin’s loss area is dominant. However, Bitcoin has achieved incredible returns that have allowed it recover up to 900% in as little as two years.

Here are some additional methodological notes to help you get back on track with the subject of this post:

Bitcoin is the digital asset under review. The U.S. Dollar is used as a comparison currency. Analysis is performed daily. Period is July 23, 2010 to June 16, 2022.

Although Bitcoin is a relatively new asset, its volatility is impressive and it is quick to recover losses. This is a sign that Bitcoin has unique characteristics and should be fully explored before you decide to add it to diversified portfolios.

The above table is long enough to show that there have been periods of greater than 20% loss and recovery, even though it only covers 12 years.

A common belief is that crypto can last for five years, compared to traditional markets which take five. This is because stocks have volatility, drawdowns, and descend speeds that are five times better than crypto. This assumption can be used to compare the 50-year market analysis to this period.

It is often less than three months to experience a loss of 40% or more. The current drawdown experienced by Bitcoin since November’s highs is highlighted in the darker dot. This means that it is within the range of the regression line, which determines (to simplify) the average value of losses and time taken to get there.

A short time interval between the high point and low point of an asset means it has a lot of volatility. However, this also means it is capable to recover. It would have failed to recover from the low point and there wouldn’t be a bottom.

Instead, smart investors, initially skeptical of Bitcoin, realized that it has interesting and unique characteristics. This asset can recover from lows, which was the case for many of them.

This is not just a market for Bitcoin, but a market that believes (albeit with imperfect models) that Bitcoin is worth a fair price, and therefore, is a bargain to purchase.

Knowing the strength of the Bitcoin recoveries can help us estimate how long it will take to reach new highs. We don’t want to be deceived into believing it can do it in a matter of months, but to have the confidence to wait if we are already invested or to see the potential for investing.

The graph below shows a regression that can be used to explain Bitcoin’s relationship with the time taken to recover from a relative low. As an example, let’s say that Bitcoin hit lows around $17,000. The recovery it must make to return to those highs is 227%. The graph shows the regression line. This allows us to derive the following formula:

Given that G is the average days it will take to recover the loss, and P is how much recovery percentage is required, it is possible to infer that it takes 214 business days for the low point of a week to reach a new high.

As no one knows, it is impossible to assume that the lowest point has been reached. It is possible to assume that the new highs will not be seen before January 2023. This means that people who have invested in the past can rest easy, but those who haven’t yet can see an opportunity to invest now, and act quickly.

Related: Part 3 of Forecasting Bitcoin Price Using Quantitative Models

These statements are very strong, I am aware. These statements are not intended to be forecasts. They are meant to provide information about the market and its structure. It is obvious that I must infer that the greater the loss, the longer it will take me to recover it. This is evident from the graph below. The derivative of the regression (recovery times based loss) is related to losses.

Here are some considerations

This analysis is based on historical data. It does not represent an actual loss. The loss is real even if the asset is not sold. Although it has not been realized, the loss is still real and the market must make the recovery as shown in the graph at the beginning of this analysis to recover its initial value.

Bitcoin is more risky than bonds and equities, but at this point in loss, it’s easier to get out than it is to recover. Bitcoin has proven that it can recover faster than the other asset classes. As with the Digital Asset Fund, it would have been prudent to exit sooner. This is because the fund is losing less than 20% per year and will require a staggering 25% to reach new highs. This compares to the 227% required by Bitcoin. It also shows that trend-following logic can reduce volatility and speed up recovery.

For the sake of reiterating the differences between Bitcoin and other asset classes (equities, bonds), I have created this graph that shows the relationship between loss time and recovery time.

This chart shows that Bitcoin has a remarkable recovery rate compared to bonds and equities. Therefore, having Bitcoin in your portfolio can help speed up your portfolio’s recovery time.

This is the most compelling reason to include digital assets in your portfolio. I recommend that you do this through an active managed quantitative fund.

This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Daniele Bernardi, a serial entrepreneur, is always looking for new ideas. Diaman is his company, founded by Bernardi. This group specializes in the development of profitable investment strategies. They recently issued the PHI Token (a digital currency) which aims to combine traditional finance and crypto assets. Bernardi’s work focuses on mathematical models development that simplify family offices and investors’ decision-making process for risk reduction. Bernardi is also the chairman and CEO of Diaman Partners, an asset management company. He is also the manager of a crypto-hedge fund. The Genesis of Crypto Assets is his book on crypto assets. The European Patent Office recognized him as an “inventor”, for his Russian and European patents in the field of mobile payments.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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