Over multiyear time horizons, Bitcoin continues to outperform every other major asset class, and it's not even close.
The S&P 500 (SNPINDEX: ^GSPC) is hitting new all-time highs at the same time as Bitcoin (BTC 0.58%) is powering to new all-time highs, and that's leading to an interesting dilemma for investors. Should they invest in the S&P 500 or Bitcoin?
The answer might 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 piling into Bitcoin these days: It's impossible to ignore Bitcoin's superior long-term returns.
Bitcoin vs. the S&P 500
The idea that Bitcoin might be a better long-term investment than the 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, equities, and emerging markets) over different time horizons going back seven years. To track the performance of equities, she used the performance of the SPDR S&P 500 ETF Trust (SPY 0.15%).
To say that Bitcoin outperformed these other asset classes over the past seven years would be an understatement. During this seven-year time period, Bitcoin's annualized returns were an impressive 44%. Other major asset classes had an average 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 every other major asset class.
And, if you ignore the down year of 2022, when Bitcoin collapsed in price, the results would arguably be even more impressive. In the time period between 2011 and 2021, Bitcoin was the top-performing asset in the world, and it wasn't even close. Bitcoin delivered annualized returns of 230%, while the S&P delivered annualized returns of 14%.
How much Bitcoin should be in your portfolio?
Using Modern Portfolio Theory, which takes into account factors such as correlations between asset classes, it's possible to calculate just how much Bitcoin should be in your portfolio. As you might have guessed by now, that percentage has been steadily rising over time.
Wood found that the optimal Bitcoin allocation increased from 1% in 2017 to just under 5% in 2021. And, given Bitcoin's heroic performance in 2023 (when it skyrocketed in value by over 150%), the optimal allocation under this theory has now ballooned to an eye-popping 19.4%!
Image source: Getty Images.
While I'm extremely bullish on Bitcoin, I would never advise someone to put nearly 20% of their portfolio into such a risky and volatile asset. After all, as even Wood acknowledges, there have been at least four major drawdowns in the history of Bitcoin when its price has collapsed by 77% or more.
Let me put that another way. Over the nearly 15-year history of Bitcoin, there have been four nightmarish periods when you stood to lose a big chunk of your wealth if you had a big portion in Bitcoin. In a typical Bitcoin meltdown, you can lose almost everything in a very short period of time.
That's scary, but it also points to Bitcoin's resilience. After every major bloodbath, Bitcoin has returned even stronger, going on to set new all-time highs. But you have to be patient. You need to have a long enough holding period to ensure that you can capture all of Bitcoin's upside while recovering from any particularly nasty drawdowns.
Does slow and steady still win the race?
Obviously, comparing the performance of Bitcoin to that of the S&P 500 is bound to be controversial. But you can't ignore the evidence. As impressive as the performance of the S&P 500 might be over a particular time period, Bitcoin is almost certain to outperform it.
Thus, if you are really serious about becoming a millionaire, you might consider adding a sliver of Bitcoin to your portfolio. Think of it as the magic rocket fuel that could send your portfolio skyrocketing to new highs. Just make sure you're buckled up and ready for some periods of extreme turbulence.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
