As Bitcoin and other cryptocurrencies gain more legitimacy, now may be the time to evaluate their potential role in a diversified portfolio. Much of this will be determined by your own individual goals and risk tolerance, but you may be surprised to learn how far Bitcoin has come in a relatively short time frame.
Due to factors like infancy and massive price swings, cryptocurrencies are generally more volatile than stocks. For example, stocks on the S&P 500 are generally more stable than Bitcoin and other cryptos. But something investors have to consider is how risk-averse they are, compared to how much growth they are seeking.
That being said, there’s no denying Bitcoin’s growth compared to traditional stocks. The digital asset outperformed all but two S&P 500 companies in 2020. In other words, Bitcoin was a better investment compared to over 95% of stocks in the S&P 500 in 2020. Plus, when you look at Bitcoin’s growth compared to the growth of the S&P 500 as a whole from April to December 2020, it’s clear that they grew at entirely different rates. The chart below shows Bitcoin (blue) and the S&P 500 (yellow) across the latter half of 2020.
Image source: Yahoo Finance
Even so, those who invested in Ethereum saw an increase of over 430% from April 2020 to the end of the year, eclipsing its technological predecessor, Bitcoin. One of the top 10 cryptocurrencies by market cap, Litecoin, has more than doubled in price as well. Of course, all of this isn’t to say cryptocurrencies are guaranteed to only increase in price. More so, cryptocurrencies like Bitcoin can exist alongside the stock market and even improve upon it with a higher potential for growth.
Why are Cryptocurrencies Growing so Fast?
The growth of cryptocurrencies is no coincidence or chance of luck. Bitcoin and other cryptocurrencies are growing partly due to their increased support from institutions. The world’s first cryptocurrency, Bitcoin, is seeing support from more vendors than ever. PayPal now enables cryptocurrency support for Bitcoin, Ethereum, Litecoin, and other top assets to over 360 million customers. With the US dollar’s decrease in value due to money printing, investment groups are viewing Bitcoin as an economic hedge as it has a maximum supply of 21 million.
Conversely, while Bitcoin is used as a currency, Ethereum can be seen as a strong store of value. It’s a platform that can be used to benefit supply chains or for investors to trade gold and other physical assets without hassle and with less volatility. To invest in Ethereum is to enable another side of the blockchain industry. Again, the utility is there, and it’s finally being recognized, especially when it comes to Ethereum 2.0.
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