A brief examination of the yearly accomplishments of the S&P 500 and Bitcoin over the past ten years.
The S&P 500 is a benchmark index that monitors the performance of the top 500 publicly traded companies in the United States, representing approximately 80% of the country’s total market capitalization.
Prominent companies like Nvidia, Apple, Microsoft, Meta Platforms, and Berkshire Hathaway form the foundation of the S&P 500 index. These companies have shown steady growth, establishing the index as a reliable investment choice. Some of these companies have outperformed the overall index individually. For example, Berkshire Hathaway had a stronger annual growth rate compared to the S&P 500 last year.
During this timeframe, Bitcoin experienced remarkable increases as well as significant decreases, with its peak growth recorded at 1,336% in 2017 and its largest decline at 73% in 2018.
Bitcoin delivered an annualized total return of 74.1% from 2013 to 2023, surpassing the S&P 500’s rate of 13.3%. Over the same period, Bitcoin achieved a total return of 25,480%, while the S&P 500 yielded 250%. This means that investing one dollar in Bitcoin in 2013 resulted in 100 times more money by 2023 compared to investing the same amount in the S&P 500.
Has Bitcoin emerged as the clear winner in the competition against the S&P 500? The competition may be limited to discussions within the cryptocurrency community. Instead, let’s examine the advantages and disadvantages of Bitcoin when compared to the S&P index.
Compared to the S&P 500, Bitcoin is a more volatile investment, characterized by sharper price skyrocket to new heights, but it can also plummet to depths that the S&P 500 rarely reaches. For example, investors who put their money into Bitcoin in December 2017 had to endure a prolonged downturn, waiting over two years to break even on their initial investment.
Taking a more aggressive approach to investing often involves greater uncertainty. To mitigate potential losses, BlackRock recommends allocating no more than 2% of one’s portfolio to Bitcoin. Notably, some investors view Bitcoin as a relatively secure investment, even more so than the S&P 500. They argue that inflation is a key consideration that many proponents of the S&P 500 overlook. Historical data supports this claim, as the S&P 500 struggled to keep pace with inflation in the 1970s and experienced another downturn in the 2000s. Nevertheless, the S&P 500 has demonstrated its resilience and reliability
Bitcoin’s unique market dynamics are characterized by brief downturns and brief upswings, making it an attractive alternative to traditional investments like the S&P 500. Over a five-year period, Bitcoin’s returns have the potential to significantly surpass inflation relatively insignificant.
Critics of the S&P 500 index also point out a disadvantage where instead of investing in a single successful company, you are essentially investing in a mix of 500 companies. This diversity can result in some companies underperforming, which can lower the overall index performance. As a result, certain individual companies may achieve higher returns than the index as a whole. Additionally, the growth of these companies is often influenced by the overall increase in the money supply.
According to a study conducted by mathematicians Aubain Nzokem and Daniel Maposa, Bitcoin exhibits a significantly higher likelihood of generating daily returns, outpacing the S&P 500 by nearly 40%. Moreover, the researchers found that Bitcoin’s value-to-risk ratio is substantially higher, boasting a four-fold advantage over the S&P 500.
Overall, it can be said that recently the S&P 500 has consistently outperformed the inflation rate, effectively maintaining the value of money. As the index is designed to include companies that may underperform at times and balance out returns, it is unlikely that it will experience a significant surge in the near future.
Bitcoin has a reputation for experiencing extreme fluctuations, often surging and plummeting unpredictably. Despite being declared defunct multiple times, it consistently bounces back at higher levels. Therefore, including Bitcoin in a diverse investment portfolio alongside more dependable assets such as the S&P 500 can provide an opportunity for experimentation and risk mitigation.
