Bitcoin: The Alien Investment of Our Time
For those of us in the developed world, bitcoin is just another investment option. It falls into an area called “alternative investments.“ Things like
- hedge funds,
- venture capital,
- private equity,
- commodities,
- real estate,
- royalties, and
- paintings
are all examples of alternative investments. More broadly, any investment that isn’t stocks and bonds represents an alternative investment.
Given that bitcoin is a cryptocurrency, with the operative word being currency, it may be confusing that I’m calling bitcoin an investment. So, let’s clear that up straight away: bitcoin’s function as a medium of exchange is dwarfed by its function as an asset. BlackRock, Fidelity, ARK, VanEck, Grayscale, and others have all released bitcoin ETFs. The purpose of these ETFs isn’t to facilitate bitcoin’s medium of exchange functionality. The purpose of these ETFs is to facilitate bitcoin ownership. BlackRock’s bitcoin ETF is the most successful ETF launch in history [1]. With well over 10,000 ETFs ever created, this is a truly remarkable feat. This would not have been possible if there wasn’t insane demand for bitcoin the asset. To understand that demand, we needn’t look any further than bitcoin’s historical price performance. Below is a comparison of bitcoin’s annual historical performance compared to other asset classes, courtesy of BlackRock [2].
Legend
- BTC: Bloomberg Bitcoin Spot Price
- SPX: S&P 500 Index
- HY: Bloomberg U.S. High Yield Corporate Bond Index
- AGG: Bloomberg U.S. Aggregate Bond Index
- EM: Dow Jones Emerging Markets Index
- CMT: Dow Jones Commodity Index
- Gold: spot exchange rate of gold against the U.S. dollar index
The above chart shows two things. First, from 2013 to 2024, bitcoin has been the best performing asset 9 out of 12 years (technically, 2024 isn’t over yet, but it’s already a wrap for the other asset classes, bitcoin is already too far ahead). So 75% of the time.
The other thing the above chart shows is that over that same time period, when bitcoin wasn’t the best performing asset, it was the worst performing asset! In other words, when bitcoin falls, it’s ugly.
However, if you’re not paying close attention to how much bitcoin is outperforming other assets, you may wonder if the down years wipe out the gains from the best years. Does it???
The answer is a resounding “NO.” On a cumulative basis, Bitcoin is light years ahead of the next best asset class. This fact is more easily seen when viewed in terms of dollars. Let’s say at the start of the 12 years, Bob put $20,000 into the S&P 500 and Alice put $20,000 into BTC. The following is what their balances would be in 2024:
- Bob: $86,690.46 (S&P 500)
- Alice: $486,279,335.27 (BTC)
BTC is alien.
It is difficult for the human mind to wrap its mind around returns like these. Can you imagine the person that 12 years ago had access to bitcoin but thought it was principally a medium of exchange–a currency? Imagine that person not only having in excess of $20,000 of bitcoin, but also proceeding to find vendors who accept bitcoin payments, trading away their bitcoin for goods they probably don’t even remember today? Easily the worst trade of a lifetime. While it’s too late for our friend who 12 years ago misunderstood bitcoin to be a currency, the good news is you needn’t suffer his fate. You have a benefit of history that he didn’t have. You have a reframing of bitcoin–from that of a currency to that of an asset– that he didn’t have.
Nobody knows what will happen in the next 12 years. One thing is for sure though, we’ll want to be along for the ride. Hope to see you onboard :-).
References
