Bitcoin vs. S&P 500: Which Is the Better Long-Term Investment?
Introduction
As the S&P 500 (SNPINDEX: ^GSPC) and Bitcoin (CRYPTO: BTC) hit new all-time highs, investors face a crucial decision: should they invest in the S&P 500 or Bitcoin? The answer may surprise you.
Bitcoin Might Still Be the Top Long-Term Investment for Aspiring Millionaires
Bitcoin’s Volatility and Institutional Interest
Yes, Bitcoin is extraordinarily volatile, and the crypto market has historically been risky. However, institutional investors are increasingly investing in Bitcoin due to its superior long-term returns.
Bitcoin vs. the S&P 500: Performance Comparison
Cathie Wood of Ark Invest recently compared Bitcoin’s price performance with six other major asset classes (gold, commodities, real estate, bonds, equities, and emerging markets) over different time horizons spanning seven years. For equities, she used the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
Jaw-Dropping Returns
Over the past seven years, Bitcoin’s annualized returns were an impressive 44%, significantly outpacing the 5.7% average return of other major asset classes. Regardless of the time horizon—seven, six, five, four, or three years—Bitcoin consistently dominated.
Ignoring the Down Year of 2022
Excluding the down year of 2022, Bitcoin’s performance between 2011 and 2021 was even more impressive. Bitcoin delivered annualized returns of 230%, compared to the S&P’s 14%.
Optimal Bitcoin Allocation in Your Portfolio
Using Modern Portfolio Theory, which considers correlations between asset classes, it’s possible to determine the optimal Bitcoin allocation in your portfolio. Wood found that this allocation rose from 1% in 2017 to nearly 5% in 2021. Following Bitcoin’s outstanding performance in 2023, the optimal allocation has now increased to 19.4%.
Caution and Risk Management
Despite being bullish on Bitcoin, it’s crucial to exercise caution. Allocating nearly 20% of your portfolio to such a volatile asset is risky. Bitcoin has experienced four major drawdowns in its history, each time collapsing by 77% or more. These periods highlight the importance of patience and a long-term holding strategy.
Bitcoin’s Resilience
After each major downturn, Bitcoin has rebounded stronger, reaching new all-time highs. However, a long enough holding period is necessary to capture Bitcoin’s upside while recovering from significant drawdowns.
Slow and Steady vs. High Risk, High Reward
Comparing Bitcoin to the S&P 500 is controversial, but the evidence suggests Bitcoin is likely to outperform over the long term. For those serious about becoming millionaires, adding a small portion of Bitcoin to your portfolio could be the rocket fuel needed for exceptional growth. Just be prepared for periods of extreme volatility.
Should You Invest $1,000 in Bitcoin Right Now?
Before you buy Bitcoin, consider this: The Motley Fool Stock Advisor analyst team identified what they believe are the 10 best stocks for investors to buy now, and Bitcoin wasn’t one of them. The 10 stocks on their list could produce significant returns in the coming years. For instance, an investment of $1,000 in Nvidia on April 15, 2005, would be worth $671,728 today.
Conclusion
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