Back in April 2020, we wrote a piece on Bitcoin entitled Bitcoin Is The Story Of The Next Decade, in which we look back at the performance of the 5 greatest picks in each of the past 5 decades, which were gold in the 1970s, followed by Japanese equities in 1980, then US growth stocks in the 1990s, China consumer staples in the 2000s and then the Tech stocks in the 2010s. Looking at the cumulative returns of the past 50 years (figure 1A), we find that a person who invested $100 in January 1970 would have accumulated over $1.1 million of wealth at the end of 2019, averaging 21.80% in annual return for a volatility of 25.0% (and a Sharpe ratio of 0.87).

Following that logic, we asked ourselves what could be the next great pick of the 2020s and we came out with bitcoin as we thought that the cryptocurrency had massive upside potential then. The simple argument was that bitcoin was going to gradually capture a share of the gold market (up to 5% initially) due to the significant rise in awareness and also the constant intervention from central banks to prevent the global economy from falling into a deflationary depression.

Surprisingly, our initial target of $30,000 was reached very quickly as the situation was constantly deteriorating in the world with governments extending their lockdown policies to fight against the new forms of variants that were spreading very aggressively. A unit of bitcoin, which was worth $7,700 at the time of the publication, currently trades above the $50,000 (and reached a high of nearly $65,000) level; it seems that participants have been rushing to buy the dips each time the cryptocurrency experienced a consolidation. Figure 1B shows the cumulative returns of the ‘Great Pick Of Each Decade’ strategy including Bitcoin since January 2020; the times series look almost unreal as our ‘wealth’ increased from $1.1mil in the end of December 2019 to $7mil today. The important question now is: can the trend continue in the medium term?

Even though there is still room to grow for bitcoin in the medium term, we think that the upside gains are now limited following the sharp rally we have seen in the past year. Hence, even though liquidity will continue to reach markets in the coming year to finance the cost of social distancing, bullish investors should be prepared for the momentum to ease significantly in the coming year, making bitcoin probably less interesting on a risk-adjusted basis.