Index investing is a great approach, but you can get even better results from time to time with certain stocks or cryptocurrencies.
Let's say you have $1,000 invested in an index fund that tracks this S&P 500 (^GSPC -0.37%) Index 5 years ago. The SPDR S&P 500 ETF (SPY -0.37%) is a popular option with minimal management fees and an excellent track record of tracking the chosen index.
If you had reinvested dividends into more Exchange Traded Fund (ETF) shares over time, you would have doubled your money by now. That's an average annual return of 15% – well above the 10-year average of 12% or the 10% annual returns since the ETF's inception 41 years ago.
It's easy to see why The Motley Fool, in the spirit of index fund pioneer John Bogle and master investor Warren Buffett, recommends maintaining a diversified stock portfolio over a long period of time. I mean, good luck finding a savings account with a stable 10% interest rate, not to mention higher profits in recent years. Diversified investing is a proven strategy for building and protecting your wealth over the long term.
But what if you picked up $1,000 of it? Bitcoin (BTC 1.58%) Token five years ago? The largest cryptocurrency at the time was in the midst of another crypto winter marred by hacking scandals and regulatory crackdowns, without significant support from major banks and other financial institutions. The Bitcoin boom's record price of $19,345 in 2017 felt like a distant memory, melting down to $3,644 per token.
Bitcoin's Rocky Five-Year Gains
As it turned out, this was a solid buying window for investors looking to invest their funds over a five-year period. A $1,000 Bitcoin investment on January 15, 2019 was worth $11,540 at the time of writing exactly five years later:
Bitcoin price data from YCharts
It hasn't been smooth sailing, but there's no denying the overall recovery over the past five years. During this period, Bitcoin investors faced more crypto exchange hacks, the coronavirus health crisis, a global inflation spike, and other challenges. Bitcoin prices fell by more than 10% in August 2023, not to mention six one-month declines of this magnitude in 2022. The chart above shows all of these headwinds and crashes.
The road ahead: bumpy but hopeful
Still, Bitcoin is back on digital feet, with more gains than losses in recent months and a robust list of upcoming catalysts for further gains.
- The next Bitcoin halving – a regularly scheduled increase in computing power required to mine new Bitcoins – is scheduled for April 2024. These events are typically followed by a strong upward trend in Bitcoin prices over the next few years.
- American regulators recently approved 11 applications for ETFs based on Bitcoin spot market prices. The approval did not result in a sharp increase in price, but rather easy access to Bitcoin-based investment instruments like that ARK 21Shares Bitcoin ETF (ARKB -0.80%) And iShares Bitcoin Trust (GO -1.00%) should ultimately increase trading volume and support higher Bitcoin prices.
- The regulatory picture is beginning to clarify, driven by renewed public interest in the crypto space and progress in key legal cases such as the U.S. Securities and Exchange Commission v. ripple (XRP -0.01%). The wheels of justice and regulatory rulemaking grind slowly, and I don't expect a full rulebook in 2024 or 2025. Still, any step toward clarity is good news, even if it doesn't always go toward lower taxes and better investor access to cryptocurrency assets .
The general long-term trend tends to far outpace traditional stock market indices like the S&P 500. Furthermore, due to the technology, market and regulatory events listed above, this bullish market sentiment is likely to continue over the next few years – with the caveat that there may be dramatic price declines along the way for a myriad of unforeseen reasons.
So Bitcoin is not a panacea for automatic investment profits, as the risk of sudden downturns and long periods of stagnant or negative returns is significant. If you're not prepared for the volatility and technicalities of Bitcoin investing, sticking with a market tracker like the SPDR S&P 500 ETF may be a better choice.
Still, it is a robust digital currency with an unpredictable but promising future, and I think a modest position in Bitcoin (or one of the Bitcoin-based ETFs) would be a healthy addition to a diversified portfolio.
Anders Bylund holds positions in Bitcoin and XRP. The Motley Fool has positions in and recommends Bitcoin and XRP. The Motley Fool has a disclosure policy.
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