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

With Bitcoin’s impressive recovery characteristic, could having it and other digital assets in an investment portfolio speed up the recovery time of…

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With Bitcoin’s impressive recovery characteristic, could having it and other digital assets in an investment portfolio speed up the recovery time of the entire portfolio?

When investing in financial markets, people often underestimate the possibility that, over a period of time, the investment may lose its value, and it will take time to recover temporary losses. The deeper the loss becomes, the more energy required to recover the losses increases out of proportion. If I invest $100 and lose 10%, I end up with $90 (whether I keep the investment or liquidate it). So, to get back to $100, which returns do I have to make? I have to make 11% because, with a base of $90, if I make 10%, I end up with $99. This effect is amplified if I lose 20% — to get back from $80 to $100, I will have to make 25%.

So, the losses are not exactly symmetrical to the gains you must make to recover them. If I find myself having lost 50% of my investment, to get back to $100 from $50, I must double it, so it should be intuitive to the reader that the more the loss is amplified, the more energy required to recover.

The bad news is that Bitcoin (BTC) has lost more than 90% of its value on one occasion, more than 80% on two other occasions, hitting during this period a performance percentage of -75%. But the good news is that it has always recovered (at least so far) from losses in a very reasonable timeframe — even the heaviest losses.

Related: Forecasting Bitcoin price using quantitative models, Part 2

The Ulcer Index, i.e., the index created by Peter Martin that calculates how long an asset has been below the previous high, is crystal clear. Investing in Bitcoin leads to ulcers for many months, but then leads to incredible returns that, if one has the patience to wait for them, make one forget the period of bellyaches from the losses incurred.

Compared to the previous two graphs, which cover a period of 50 years while this one only covers 12 years, the presence of the loss area is predominant, even though, in reality, Bitcoin has always achieved incredibly high returns that have allowed it to recover as much as 900% in less than two years.

Returning to the topic of this post, here are some further methodological notes:

  • The digital asset under consideration is Bitcoin;
  • The comparison currency used is the U.S. dollar;
  • The frequency of analysis is daily; and
  • The period is from July 23, 2010, until June 16, 2022, the day the analysis was carried out.

Although Bitcoin's history is very recent, its volatility and speed of recovering losses is remarkable, an indication that this asset has characteristics all its own to be explored and understood to the fullest before possibly deciding to include it within a diversified portfolio.

As you can see from the length of the above table, there have been many periods of loss and recovery in excess of 20%, albeit in only 12 years of history.

It is a widely held opinion that one year in crypto corresponds to five in traditional markets. That is because, on average, volatility, drawdowns and descend speed are five times superior to stocks. Based on this assumption, while being aware that the period under consideration is short, we can try to compare it to the 50-year analysis of the markets.

As can be seen, the days it takes to have a 40% or greater loss often number less than three months. The darker dot is the current drawdown suffered by Bitcoin since the November highs, or about 220 days so far, making it in line with the regression line that determines (to simplify) an average value of the relationship between losses and the time to get there.

While an asset having short intervals in getting to the low point means that it has a great deal of volatility, it also means that it is capable of recovering. Otherwise, it would not have recovered from that low and, indeed, there would not even be a bottom from which to rise.

Instead, shrewd investors who were initially dubious of Bitcoin until it proved to rise again in the COVID-19 onset period (that is, March-April 2020) realized that this asset has unique and interesting characteristics, not the least of which is its ability to recover from the lows.

This means not only that there is a market, but that there is a market that considers (albeit still with imperfect models) that Bitcoin has a fair value price and so, at certain values, it is a bargain to buy.

Understanding, therefore, the strength of the recoveries that Bitcoin has been able to make can give us an estimate as to how long it may take it to recover to new highs — not to delude ourselves into thinking that it can do so in a few months (although, on a few occasions, it has surprised everyone), but to give us the peace of mind to wait if already invested, or to understand the opportunity ahead if, so far, we have been hesitant toward investing.

From the graph above, a regression can be extracted that explains Bitcoin's relationship to the time it took to recover a new high from the relative low. To give an example, assuming and not granting that Bitcoin has hit lows of about $17,000, the recovery it needs to make to get back to the highs is 227%. So, the following the formula can be derived from the regression line described in the graph:

Where G is the expected days to recover the loss and P is the recovery percentage required, it can be inferred that it takes 214 days from the low of a week ago to return to a new high.

Of course, assuming that the low has already been hit is a stretch as no one can truly know. However, it can be assumed that it is would be very unlikely to see the new highs again before January 2023, so people can put their hearts at rest if they have invested and are suffering the loss, while perhaps those who have not yet invested can realize that they have a very interesting opportunity in front of them to consider, and quickly.

Related: Forecasting Bitcoin price using quantitative models, Part 3

I realize that these statements are strong. They are not meant to be a forecast, but only an analysis of the market and its structure, trying to give as much information as possible to the investor. Obviously, it is necessary to infer that the worse the loss gets, the longer I will have to be willing to wait to recover it, as can be seen from the graph below, which is the derivative of the regression in the graph above (recovery times based on loss) related to losses incurred.

Some considerations:

  • The analysis reported here represents an estimate based on historical data; there is no guarantee that the market will recover within or around the estimated values.
  • There is no assumption that would establish the current loss as a period low.
  • Not selling does not mean that the loss is not real; the loss is such even if the underlying asset is not sold. It is not realized but it is still real, and the market will have to make the recovery corresponding to the graph at the start of this analysis to recover the initial value.

Unlike the two asset classes equities and bonds, in the case of Bitcoin at this point of loss, getting out represents more of a risk than an opportunity, because Bitcoin has shown that it can recover much faster than those other two asset classes. It would have been necessary to exit earlier, as we did with the alternative Digital Asset Fund, which is losing less than 20% YTD and thus will need a ridiculous 25% to get back to new highs for the year, compared to the 227% needed by Bitcoin to climb back up, evidence that using trend-following logic reduces volatility and recovery time.

To reiterate, however, the difference between Bitcoin and the other two asset classes (equities and bonds), I have compared the three on this graph of relationship between loss and recovery time:

It is clear from this chart that Bitcoin has an impressive recovery characteristic compared to equities and bonds, so having a percentage, even a small percentage, of Bitcoin in a portfolio can speed up the recovery time of the entire portfolio.

This is probably the best reason to have a percentage of digital assets in a portfolio, preferably through an actively managed quantitative fund, of course, but you already know this since I am in conflict of interest.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Daniele Bernardi is a serial entrepreneur constantly searching for innovation. He is the founder of Diaman, a group dedicated to the development of profitable investment strategies that recently successfully issued the PHI Token, a digital currency with the goal of merging traditional finance with crypto assets. Bernardi’s work is oriented toward mathematical models development which simplifies investors’ and family offices’ decision-making processes for risk reduction. Bernardi is also the chairman of investors’ magazine Italia SRL and Diaman Tech SRL and is the CEO of asset management firm Diaman Partners. In addition, he is the manager of a crypto hedge fund. He is the author of The Genesis of Crypto Assets, a book about crypto assets. He was recognized as an “inventor” by the European Patent Office for his European and Russian patent related to the mobile payments field.

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The SNF Institute for Global Infectious Disease Research announces new advisory board

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in…

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March 13, 2024

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From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

Credit: Lori Chertoff/The Rockefeller University

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

This international advisory board was created in part to give guidance on how to best use SNFiRU’s resources, as well as bring forward innovative ideas concerning new avenues of research, public education, community engagement, and partnership projects.

SNFiRU was established to strengthen readiness for and response to future health crises, building on the scientific advances and international collaborations forged in the context of the COVID-19 pandemic. Launched with a $75 million grant from the Stavros Niarchos Foundation (SNF) as part of its Global Health Initiative (GHI), the institute provides a framework for international scientific collaboration to foster research innovations and turn them into practical health benefits.

SNFiRU’s mission is to better understand the agents that cause infectious disease and to lower barriers to treatment and prevention globally. To speed this work, the institute launched numerous initiatives in its inaugural year. For instance, SNFiRU awarded 31 research projects in 29 different Rockefeller laboratories for over $5 million to help get collaborative new research efforts off the ground. SNFiRU also supports the Rockefeller University Hospital, where clinical studies are conducted, and brought on board its first physician-scientist through Rockefeller’s Clinical Scholars program. “One of the surprises was the scope of interest from Rockefeller scientists in using their talents to tackle important infectious disease problems,” says Charles M. Rice, Maurice R. and Corinne P. Greenberg Professor in Virology at Rockefeller and director of SNFiRU. “The research topics range from the biology of infectious agents to the dynamics of the immune response to pathogens, and also include a number of infectious disease-adjacent studies.”

In the past 12 months, SNFiRU often brought together scientists studying different aspects of infectious disease as a way to spur new collaborations. In addition to hosting its first annual day-long symposium, SNFiRU initiated a Young Scientist Forum for students and post-doctoral fellows to meet regularly, facilitating cross-laboratory thinking. A bimonthly seminar series has also been established on campus.

Another aim of SNFiRU is to develop relationships with community-based organizations, as well as design and participate in community-engaged research, with a focus on low-income and minority communities. To that end, SNFiRU is helping develop a research project on Chagas disease, a tropical parasitic infection prevalent in Latin America that can cause congestive heart failure and gastrointestinal complications if left untreated. The project will bring together clinicians practicing at health centers in New York, Florida, Texas, and California and basic scientists from multiple institutions to help the communities that are most impacted.

“The SNFiRU international advisory board convenes globally recognized leaders with distinguished biomedical expertise, unrivalled experience in pandemic preparedness and response, and a shared commitment to translating scientific advancements into equitably distributed benefits in real-world settings,” says SNF Co-President Andreas Dracopoulos. “The advisory board will advance the institute’s indispensable mission, which SNF is proud to support as a key part of our Global Health Initiative, and we look forward to seeing breakthroughs in the lab drive better outcomes in lives around the globe.”

The new advisory board will hold its first meeting on April 11th, 2024, following the second annual SNF Institute for Global Infectious Disease Research Symposium at Rockefeller.

Its members are: Rafi Ahmed of Emory University School of Medicine, Cori Bargmann of The Rockefeller University, Yasmin Belkaid of the Pasteur Institute, Anthony S. Fauci, the former director of the National Institute of Allergy and Infectious Diseases, Peter Hotez of Baylor College of Medicine and Texas Children’s Hospital Center for Vaccine Development, Esper Kallas of of the Butantan Institute, Sharon Lewin of the University of Melbourne Doherty Institue, Carl Nathan of Weill Cornell Medicine, Rino Rappuoli of Fondazione Biotecnopolo di Siena and University of Siena, and Herbert “Skip” Virgin of Washington University School of Medicine and UT Southwestern Medical Center.

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Q4 Update: Delinquencies, Foreclosures and REO

Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO
A brief excerpt: I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened followi…

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March 13, 2024

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Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO

A brief excerpt:
I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble). The two key reasons are mortgage lending has been solid, and most homeowners have substantial equity in their homes..
...
And on mortgage rates, here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q3 2023 (Q4 2023 data will be released in a two weeks).

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 22.6% of loans are under 3%, 59.4% are under 4%, and 78.7% are under 5%.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.
There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

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‘Bougie Broke’ – The Financial Reality Behind The Facade

‘Bougie Broke’ – The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming…

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3 hours ago

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March 13, 2024

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'Bougie Broke' - The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.

Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.

Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.

The Wealth Divide Disclaimer

Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.

Bill Gates and I walk into the bar…

Bartender: “Wow… a couple of billionaires on average!”

Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.

According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.

To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.

The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.

Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption.

Revenge Spending

Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.

A great example is revenge spending. Per the New York Times:

Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.

So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.

The Means To Consume 

Savings, debt, and wages are the three primary sources that give consumers the ability to consume.

Savings

The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.

Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by Payroll.org estimates that 78% of Americans live paycheck to paycheck.

More on Insufficient Savings

The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.  

Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.

Debt

After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic. 

The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.

The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.

The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.

With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?

Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More telling, according to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!

Wage Growth

Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.

In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.

It’s All About Employment

The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.

The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.

However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.

It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.   

Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!

Summary

There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.

Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.

The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.

Tyler Durden Wed, 03/13/2024 - 09:25

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