Bitcoin Hits $100K: A Rollercoaster Worth Riding?

December 5th marks a historic milestone for Bitcoin as it surpasses $100,000 for the first time, boasting an impressive 126.6% total return over the past year—far outpacing the S&P 500’s 34.8% total return¹. This surge reflects not only a confluence of macroeconomic trends, pro-crypto policies, and strong market sentiment but also Bitcoin’s inherent volatility. Like a rocket ship, the higher it soars, the faster it can fall.

Bitcoin Hits Six Figures on December 5, 2024: Surpassing $100K for the First Time

Source: Bloomberg, from 11/5/2019 to 12/5/2024.

• Pro Crypto Administration: Donald Trump branded himself as the pro-crypto candidate for president on the campaign trail. On December 5th, Trump signaled his warmness towards crypto by unveiling Paul Atkins as his intended nominee to lead the SEC. Atkins has a history of being a crypto advocate. In July, the president elect promised to launch a strategic national crypto stockpile at the largest crypto convention in Nashville. Additionally, Trump has sought to make the tax code friendlier to cryptocurrency.

• The Goldman Sachs Bull/Bear Index:  Market sentiment has been a key driver of Bitcoin's recent surge. The sentiment index surpassed 70% in November and climbed to 73% in the initial December print, signaling strong optimism. Historically, elevated sentiment often precedes market tops but can persist for years, as seen during the dot-com bubble. However, Bitcoin has also declined during periods of uncertainty, such as the pandemic, mirroring broader market trends, as noted in the Elsevier Financial Research Letter. This raises uncertainty about whether the rally will continue, or a correction is imminent.

• BRICS+ Nations Explore De-dollarization: On the macro front, a shift away from the dollar as the reserve currency has also been a tailwind, as BRICS+ continues to gain influence on the international stage. Bitcoin is often referred to as digital gold, and many see the cryptocurrency as a way to hedge dollar uncertainty similar to gold. In October 2024, the BRICS summit in Kazan, Russia, highlighted plans to reduce reliance on the U.S. dollar through a Cross-Border Payment System facilitating trade in local currencies. Additionally, BRICS nations proposed a blockchain-based payment system, with Bitcoin positioned as a tool for bypassing trade restrictions.

• Ongoing Inflation Concerns Above the 2% Neutral Rate:  Bitcoin's reputation as an inflation hedge continues to attract investors. Despite a slight decline in inflation expectations, the Federal Reserve Bank of New York reports a 1-year median inflation rate of 2.9% and a 3-year rate of 2.5%—both above the 2% neutral level². Historically, Bitcoin has performed well in inflationary environments as investors look to protect their purchasing power.
   

What Happens After Bitcoin Hits New Highs?

Historical analysis of Bitcoin’s performance 18 months after reaching new highs reveals its dual nature—offering significant upside potential but also substantial risks:

• Average Return: Bitcoin has delivered an impressive average return of +78.8% over 18 months following a new high, showcasing its potential to generate outsized gains.

• Negative Outcomes: However, 35% of the time, Bitcoin has posted negative returns over this 18-month period, illustrating the unpredictability of its trajectory.

• Worst Outcome: The most extreme downside occurred between June 2021 to December 2022, when Bitcoin experienced a nearly -65% decline, with a maximum drawdown exceeding -76%. Such declines can test even the most seasoned investors.

• Average If Negative: When Bitcoin’s returns are negative, the average loss exceeds -50%, underscoring the severe downside risk that accompanies its high-reward potential.

• Best Outcome: On the flip side, Bitcoin’s best 18-month performance saw a +263% return from August 2020 to November 2021, demonstrating its ability to deliver multi-bagger returns during favorable market conditions.

The data presented is based on the 18-month historical performance of Bitcoin following new highs, covering the period from 12/31/2017 to 12/2/2024.

Bitcoin’s Wild Ride After New Highs: Mapping Returns 18 Months Post-Record Peaks (2018-2024)

Source: Bloomberg. Market tops are based on weekly returns from 12/31/2017 to 12/2/2024.
Returns are derived from the Bloomberg Bitcoin Index.
Past performance is not indicative of future results. Cryptocurrencies are highly volatile and speculative investments.

These historical data points paint a vivid picture of Bitcoin’s high-risk, high-reward dynamic. While it can deliver massive gains, Bitcoin comes with the possibility of sharp declines that can be difficult to weather for many investors.

The Steep Climb of Recovery After Big Losses 

As illustrated in the chart below, an investment’s recovery from significant declines is not symmetrical. For instance, a 50% drop requires a subsequent 100% return to break even. In the case of an 80% decline—a scenario Bitcoin has experienced multiple times in the past—a staggering 400% rally is needed just to recover.

The Road to Recovery: Returns Needed After Bitcoin’s Hypothetical Declines

The information presented is for illustrative purposes only and does not guarantee future performance.

Why Consider a Risk-Managed Bitcoin Fund?

Can you or your clients handle the possibility of a -80% drop for the chance at a multi-bagger return? Some investors can, but others may prefer to participate in Bitcoin’s growth without enduring its gut-wrenching volatility. For these investors, a risk-managed Bitcoin fund provides a balanced approach—offering exposure to Bitcoin’s upside potential while mitigating downside risk. A risk-managed bitcoin fund offers investors Bitcoin exposure without the headaches of buying and the risks of storing the cryptocurrency.

Risk management strategies can help mitigate against such dramatic declines, potentially lowering the required recovery threshold and smoothing the investment journey.

As Bitcoin adoption grows globally, now may be the time to explore solutions that help investors navigate its volatility while capturing long-term opportunities.

Risk-managed funds involve risks, including the potential loss of principal, and may not eliminate all downside risk. Investors should carefully evaluate their investment objectives and risk tolerance. The views, opinions and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services.