Once again, Bitcoin beat the S&P 500 in yearly growth. Is it time to trade the index for crypto?

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2024 marked an exceptional year for Bitcoin with its value increasing by a substantial 111%. In contrast, the widely recognized S&P 500 index demonstrated a more modest growth of 24% in the same period. Some might argue that investing in Bitcoin represents a riskier or more daring venture compared to the traditional S&P 500 market. However, opinions on this subject can vary.

A quick look at the annual performance of the S&P 500 and Bitcoin in the last decade

The S&P 500 represents an index that follows the top 500 performing companies in the United States stock market. Together, these leading companies typically account for about 80% of the total market value of all U.S. companies.

These heavyweight corporations like Nvidia, Apple, Microsoft, Meta Platforms (Facebook), Berkshire Hathaway, and others form the backbone of the S&P 500 stock market index. These companies’ values tend to increase regularly, giving the index a reputation for being a secure investment choice. It’s worth noting that the individual performance of some of these companies can sometimes outshine the overall performance of the index. For example, Berkshire Hathaway experienced a greater annual growth rate compared to the S&P 500 last year.

During that timeframe, Bitcoin experienced remarkable surges followed by considerable drops. Its greatest expansion occurred in 2017, reaching an astounding growth rate of 1,336%, while it suffered its steepest decline in 2018, plummeting by a substantial 73%.

Over a ten-year span from 2013 to 2023, Bitcoin’s annualized total return outperformed the S&P 500 significantly. To be precise, Bitcoin’s return was a staggering 25,480%, while the S&P 500 only yielded 250%. This means that an initial dollar investment in Bitcoin would have returned 100 times more money by 2023 compared to the same initial dollar investment in the S&P 500.

Those who make informed decisions recognize that Bitcoin, rather than the S&P 500, serves as the ultimate yardstick for investment performance. Over time, a growing number of investors are expected to embrace this shift in perspective.

— Anthony Pompliano 🌪 (@APompliano) January 3, 2025

As a researcher, it seems more accurate to say that the competition between Bitcoin and the S&P 500 might be more of a topic within cryptocurrency discussions rather than an actual battle. To better understand their respective merits, let’s compare some key aspects of Bitcoin against the S&P index:

1. Decentralization vs Centralized Structure: Bitcoin operates on a decentralized network, meaning it is not controlled by any single entity. In contrast, the S&P 500 is an index composed of large companies listed on stock exchanges, which are regulated and managed centrally.

2. Volatility: Bitcoin’s value tends to fluctuate significantly due to its relatively small market size and limited adoption compared to the established corporations represented in the S&P 500. This volatility can lead to both substantial gains and losses.

3. Inflation Protection: Bitcoin has a finite supply of 21 million coins, making it potentially attractive as a hedge against inflation because its money supply cannot be increased like traditional fiat currencies or the stocks in an index like the S&P 500.

4. Lack of Dividends: Unlike the companies in the S&P 500, Bitcoin does not provide dividends to its holders.

By examining these factors, we can better appreciate the unique advantages and drawbacks that each presents within their respective contexts, rather than viewing it as a straightforward battle between them.

Bitcoin vs the S&P 500

Investing in Bitcoin is riskier compared to the S&P 500 as it experiences greater fluctuations, with both higher peaks and deeper valleys than the S&P 500. If you had purchased Bitcoin in December 2017, you would need to wait more than two years before recovering your initial investment.

As a cautious crypto investor, I recognize that taking on more risk can lead to potentially higher rewards – but it’s also important to remember that these ventures may come with greater uncertainty and potential losses. BlackRock recommends limiting Bitcoin investments to no more than 2% of one’s portfolio to minimize the risks involved.

Some, however, see Bitcoin as a relatively safe investment compared to traditional options like the S&P 500. They argue that inflation could be a factor overlooked by many supporters of the S&P 500. In the 1970s, for instance, the S&P 500 wasn’t as secure as some might think, given that inflation rates often surpassed the returns generated during this period. The early 2000s also saw a less-than-ideal situation for the S&P 500.

That being said, in other instances, long-term investment in the S&P 500 has proven to be a relatively safe bet. It’s essential to weigh the pros and cons of various investments and make informed decisions based on one’s individual risk tolerance and financial goals.

Compared to the S&P 500, Bitcoin has shorter intervals of negative annual yields and shorter intervals of positive ones, making it more appealing for some investors because in a five-year span, Bitcoin’s returns might significantly exceed inflation rates, causing traditional investment charts to be overlooked during these periods.

A criticism leveled against the S&P 500 index is that rather than investing in a thriving business, you’re essentially buying shares in 500 different businesses. This can lead to the performance of the index being negatively impacted by underperforming companies within it (which might explain why some individual companies outperform the index). It’s also important to note that the growth of certain companies is often linked to the increase in the money supply.

As an analyst, I’ve uncovered some intriguing findings in my study comparing Bitcoin and the S&P 500. The research conducted by mathematicians Aubain Nzokem and Daniel Maposa reveals that Bitcoin has approximately 40% more likelihood of generating daily returns compared to the S&P 500. Furthermore, the value-to-risk ratio for Bitcoin is roughly four times greater than for the S&P 500. In simpler terms, for each unit of risk taken, potential returns from Bitcoin are four times higher than those from the S&P 500.

From an analyst’s perspective, over the recent period, it has been typical for the S&P 500 to outpace inflation, fulfilling its primary role of preserving the value of one’s investments. However, reaching “the moon,” a term often used for extraordinary growth, might not be in its nature. This index is designed to provide diversified exposure to companies, some of which are expected to underperform at certain times, thereby averaging out the returns.

Instead of saying Bitcoin is always prone to rapid increases and declines, consider rephrasing it as “Bitcoin’s value fluctuates dramatically, often reaching new peaks before being declared ‘dead’, only for its value to rise again.” This makes the sentence easier to understand by describing the volatile nature of Bitcoin while incorporating the irony that its value has been deemed insignificant multiple times at record highs. Additionally, the sentence suggests that Bitcoin can be an intriguing addition to a diversified investment portfolio that includes more stable investments like the S&P 500.

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2025-01-06 14:38