How Does Bitcoin Stack Up Against Alternative Investments?
Bitcoin exists as a decentralized monetary alternative to traditionally centralized, government-controlled paper money. At least that’s the principle intent of Bitcoin (and really all things blockchain).
That being said, if Bitcoin is proving anything, it’s that investors are hungry for another way to turn a profit, and thus, the average Bitcoin holder is more progressive investor than progressive consumer.
Bitcoin is digital gold. Investors are proving it right now with the price increasing as governments continue to hand out stimulus packages to try to keep the economy afloat as the world struggles to push through the fallout of the coronavirus pandemic. Investors are clearly using cryptocurrencies as a hedge in the market. That behaviour brings up a very interesting question. Is Bitcoin really a solid alternative investment?
Comparing Bitcoin to Other Investing Options
One way to answer that question is to compare Bitcoin to other, more traditional investments like stocks. After all, that’s what the wolves on Wall Street do. They compare investments to major stock market indices and judge whether they can outperform those indices. The most popular index fund to compare your investing chops to is the S&P 500. The S&P 500 allows investors to purchase the top 500 Companies in America by market capitalization as one share price. It includes many of the blue-chip stocks of brands we all recognize like Apple, Microsoft, Walmart etc…
In theory it’s obvious that comparing any investment to the S&P 500 is a smart move. You want to know if you’re doing better than some of the best companies in the world and you can do it without analysing individual companies. Perfect right?
The downside of using major indices or traditional investments as a benchmark for Bitcoin is that Bitcoin is far from a traditional investment. It fluctuates like crazy. An entire generation of investors doesn’t understand it, and governments are still working out how to regulate it 12 years after its invention.
That’s why perhaps the truest way to compare whether or not investing in Bitcoin is worthwhile is to compare it to other more ‘exotic’ investments and see how it stacks up.
Since Bitcoin is regarded as digital gold and investors use it more like a commodity than a medium of exchange, we’ll start by comparing it to actual physical gold. We’ll also compare it to art & collectibles, wine and scotch.
Before we dive deep into direct comparisons, let’s discuss why investments like Bitcoin, gold and art work seemed to be at least somewhat recession proof and why investors tend to pour money into those kinds of assets during times of uncertainty.
Why Certain Investments Take Off During Economic Slumps
When you think of a hedge fund manager, what image comes to mind? You’re probably thinking about some analytically gifted, slick, three-piece suit wearing savant who makes a lot of money. Hollywood movies go to great lengths to portray this image, but what does a hedge fund manager do exactly?
They organize large amounts of investment capital in a way that hedges against risk. They invest this into all kinds of different asset classes and industries, and ultimately their job is to make money for clients in the long run whether the market is going up or down in the short term.
If you think deeply about it, hedging your risk is important whether you’re a hedge fund manager or a beginner investor just putting your wealth into the market for the very first time. The wealthiest investors in the world, whether their weapon of choice is stocks, real estate, Bitcoin or wine, all have one thing in common. They all have a long-term view of where they want to be years if not decades from now.
The True Value of a Long-Term Investing Mindset
Pretend for a moment that you have $1,000 to play with in the market. You’re really confident about your investing knowledge so you throw the whole thing into one stock. Something happens that you didn’t anticipate and you lose 90% of the money, so you’re left with $100. Your goal now is to make it back to the $1,000 you started with. What rate of return do you need to earn on your next stock pick in order to make it back to $1,000? The answer to that question is 1,000%.
The above example is exactly why a long-term mindset is crucial to succeeding as a progressive investor, even if you have short-term goals. It’s a lot easier to lose 90% of your wealth then it is to find an investment that will 10x your returns after you’ve lost most of your principle.
That’s why investments alternative investments that don’t necessarily correlate to more traditional instruments become more popular during times of economic uncertainty. The wealthiest investors know to always protect the downside.
Investing in Bitcoin versus Gold
At the present moment, the price of gold is fluctuating above $2,500 an ounce. The precious metal consistently flirts with all-time highs these days as investors continue to flood towards it during this time of economic uncertainty. It makes sense if you think about it. Yes, it’s true that gold is no longer used as a form of currency on a day-to-day basis. However, gold is a key industrial ingredient used in computers, smartphones and other technologies, and will play a key role in the advancement of societies looking to turn metropolitan areas into “smart cities.” That’s part of the reason the price of gold is up nearly 50% over the last five years.
Compare that to the S&P 500, which sat at 2,160 points at this time, five years ago, and now currently sits more than 55% higher than that at nearly 3,400 points at the time of this writing. Keeping in mind that much of those gains have come in the few months since the coronavirus spread across North America in March, and it’s easy to see that gold is quite good at keeping up with the benchmark.
Keep in mind that over that same period of time, Bitcoin’s value has gone from just over $740 Canadian to $15,000 Canadian at the time of this writing.
Investing in Bitcoin versus Art & Collectibles
An artist’s work is almost always worth more once the artist passes away. That makes sense because scarcity creates value and if an artist is no longer alive, they can’t make any more original artwork. Perhaps your local artist drawing caricatures of passersby on a Saturday afternoon isn’t worth investing in, but the world’s most famous artists can definitely do a lot for your investment portfolio. Jean-Michel Basquiat, Monet, Andy Warhol, Pablo Picasso and other artistic legends routinely have their painting sold for seven, eight or sometimes nine-figure sums.
With that kind of capital being invested in fine works of art, it shouldn’t come as a surprise that high-end artwork is outperforming the S&P 500 over the last 20 years by more than 250%.
High-end art is certainly a great long-term investment. That’s not just because of the rate of return or the scarcity of a particular piece, it’s also because it’s a fairly illiquid asset. It’s not that easy to turn a $50 million work of art into cash the way you could liquidate $50 million worth of stock or bitcoin. You need to be able to find somebody who has $50 million and appreciates the artwork enough to spend it on a painting instead of a security.
The challenge with investing in artwork is that the average person doesn’t have millions of dollars to buy an original Andy Warhol. But don’t count art out of your alternative investing portfolio just yet. Masterworks.io allows you to buy shares of paintings using cryptocurrency in the blockchain. The company itself buys the painting under a corporate name and essentially sells you shares in the painting. This means you don’t have to worry about storing or maintaining the painting itself and you don’t need millions of dollars to get in the game.
Paintings obviously have an outdone the price of bitcoin over the last five or 10 years, but the average fine work of art does trump the stock market.
Investing in Bitcoin Versus Fine Wine and Scotch
Earning 250% more than the S&P 500 by investing in works of art will no doubt make you happy in the long run. But is it possible that investing in wine will serve you even better? Absolutely!
Dating back to January 2003, Burgundy red wine is appreciating five times faster than the S&P 500. It’s a wine meant for the true connoisseur.
Much like fine art, fine wines appeal to a very specific group of people who appreciate the lengthy process involved in manufacturing, storing and properly aging wine. Generally speaking, the more effort and time that is involved in producing an aging an exquisite glass of wine, the more valuable it is. Add to that the fact that the rating a wine receives from critics can also add greatly to its value, and you have yourself quite the investment.
Why Bitcoin is Still the Best Alternative Investment
Now that you’ve discovered there are many ways to turn one dollar into two besides investing in the stock market or buying a property, you can feel free to conjure up images in your mind of staring at the beautiful Mona Lisa while enjoying a classy glass of wine and relishing in the fact that you own a piece of both.
But is Bitcoin still the better alternative investment for you?
The answer is… it depends. A progressive investor doesn’t just put all of their money into one asset class and wait for it to go ‘to the moon.’ Diversifying your investment income is an important wealth building strategy.
That said, going by the numbers and the fact that Bitcoin’s price has appreciated more than 2,100% over the last five years, it’s easy to say that putting at least some of your wealth into cryptocurrencies is probably a smart move.
If you’re ready to do that, take the plunge using a cryptocurrency exchange in Canada. Netcoins.ca makes it really easy to buy Bitcoin and a handful of other cryptocurrencies at fair market prices really easily with the utmost convenience.
Get started on your cryptocurrency journey today and consider this article is food for thought as you continue looking outside of just traditional stock market, real estate and mutual fund investments. There are plenty of other ways to turn a dollar. The worlds of precious metals, fine art, wine and digital currencies are proving that time and time again.
Written by: Jack Choros
Writer, content marketing at Netcoins.