Bitcoin
Forget the S&P 500: Bitcoin Could Still Be the Best Long-Term Investment If You Want to Retire a Millionaire
Over multi-year horizons, Bitcoin continues to outperform all other major asset classes, and it’s not even close.
O S&P 500 (SNPINDEX: ^GSPC) is making new highs at the same time as Bitcoin (Bitcoin -0.19%) is hitting new all-time highs, which is leading to an interesting dilemma for investors. Should they invest in the S&P 500 or Bitcoin?
The answer may surprise you. Yes, Bitcoin is extraordinarily volatile. And yes, the crypto market has historically been a very risky place to invest. But there’s a good reason why institutional investors are betting on Bitcoin these days: It’s impossible to ignore Bitcoin’s superior long-term returns.
Bitcoin versus S&P 500
The idea that Bitcoin might be a better long-term investment than S&P 500 It may be controversial, but consider the evidence. Cathie Wood of Ark Invest recently crunched the numbers and the results are jaw-dropping, to say the least.
Wood compared Bitcoin’s price performance to that of six other major asset classes (gold, commodities, real estate, bonds, stocks and emerging markets) over different time horizons going back seven years. To track stock performance, she used stock performance. SPDR S&P 500 ETF Fund (SPY 0.91%).
To say that Bitcoin has outperformed these other asset classes over the past seven years would be an understatement. During this seven-year period, Bitcoin’s annualized returns were an impressive 44%. Other major asset classes averaged a return of just 5.7%. In fact, it didn’t matter if you looked at a seven-year, six-year, five-year, four-year, or three-year time horizon. The results were always the same: Bitcoin dominated all other major asset classes.
And, if you ignore the down year of 2022, when the price of Bitcoin collapsed, the results would arguably be even more impressive. In the period between 2011 and 2021, Bitcoin was the best performing asset in the world, and it wasn’t even close. Bitcoin delivered 230% annualized returns, while the S&P delivered 14% annualized returns.
How much Bitcoin should you have in your portfolio?
Using Modern Portfolio Theory, which takes into account factors such as correlations between asset classes, it is possible to calculate how much Bitcoin should be in your portfolio. As you may have already guessed, this percentage has been steadily increasing over time.
Wood found that Bitcoin’s optimal allocation has increased from 1% in 2017 to just under 5% in 2021. And given Bitcoin’s heroic performance in 2023 (when its value soared by more than 150%), the optimal allocation under this theory has now increased. to a whopping 19.4%!
Image source: Getty Images.
Although I am extremely bullish on Bitcoin, I would never advise anyone to invest almost 20% of their portfolio in such a risky and volatile asset. After all, as even Wood acknowledges, there have been at least four major crashes in Bitcoin’s history, when its price fell by 77% or more.
Let me put this another way. Over the nearly 15-year history of Bitcoin, there have been four nightmarish periods where you could lose a large portion of your wealth if you had a large portion in Bitcoin. In a typical Bitcoin collapse, you can lose almost everything in a very short period of time.
This is scary, but it also points to Bitcoin’s resilience. After each major bloodbath, Bitcoin came back even stronger, setting new all-time highs. But you have to be patient. You need to have a long enough holding period to ensure you can capture all of Bitcoin’s upside while recovering from any particularly nasty dips.
Does slow and steady still win the race?
Obviously, comparing Bitcoin’s performance to that of the S&P 500 will be controversial. But you can’t ignore the evidence. No matter how impressive the S&P 500 performs over a given period of time, Bitcoin is almost certain to outperform it.
So, if you really want to become a millionaire, you might consider adding a slice of Bitcoin to your portfolio. Think of it as the magic rocket fuel that can take your portfolio to new heights. Just make sure you’re buckled up and ready for some periods of extreme turbulence.