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2024 Returns and Volatility
If Bitcoin is indeed an entirely new asset class, then we must compare its returns against other asset classes. Bitcoin returned over 113% in 2024, and eclipsed the other major asset classes. Based on ETF proxies, the S&P 500 (SPY) returned 23.7%, gold (GLD) returned 28.7%, government bonds (GOVT) returned -2.18%, and real estate (VNQ) returned -0.93%. In terms of returns, Bitcoin clearly beat the others.
But what about risk? Returns are not the whole picture. The other key dimension is risk. Traditional finance measures risk by volatility, namely, the fluctuation in the stock price. Calculating annual volatility is a transformation of daily volatility, which itself is the standard deviation of log returns of the asset. Rational, risk-averse investors will accept higher risk if it comes with greater returns.
As you can see, bitcoin, equities, gold, and bonds are roughly on the same linear trajectory, which starts in the lower left corner of the chart and goes up to the upper right corner. This is what economists call the "capital market line," which maps out the extra amount of return needed to compensate for extra risk. Those four assets follow the same pattern: Greater risk requires a greater return. The only exception to the rule is real estate, which had a bad year (high risk, low returns). Last year was not the year to invest in real estate, since you could have done about the same with government bonds, with much less risk. Bitcoin, in this sense, is not breaking any rules. It is simply offering a new choice for investors seeking higher risk and higher returns.
The capital market line does not ask the more elemental question of “What is the right amount of risk investors should bear?” That is up to individual preferences. Historically, financial markets have always classified equities as risky and bonds as safe. But with bitcoin on the map, now equities seem safe relative to bitcoin. Another way to cast this chart is that traditional measures of returns compute only nominal returns, not real returns, i.e., returns after inflation. When factoring out the devaluation of the U.S. dollar, government bonds and real estate earn negative real returns.
Is volatility a problem?
For 2024 at least, the returns from Bitcoin exceeded the other assets so much that it forces an uncomfortable question: How much does volatility really matter? And to whom? And when?
