Should You Invest in Stocks or Bitcoin?
While market watchers await the arrival of Dow 20,000, Bitcoin, the nascent digital currency nearing its 8th birthday, make actually reach its own milestone before the Dow as it continues its multi-year bullish rally towards $1000.
Since the Presidential election of Donald Trump, markets can more clearly price future expectations and in turn, both Bitcoin and the Dow Jones Industrial Average are rallying to near unprecedented heights. The surge of Bitcoin’s price, however, has primarily been fueled through interest abroad, with geopolitical pressures and monetary environments in China, India, and Venezuela pushing investors towards the independently minded digital alternative.
Bitcoin's Strong Returns
Over the years, Bitcoin has performed strongly with significant returns and continuing customer adoption. Of all currencies worldwide, Bitcoin yielded greater returns than any for 5 out of the previous 6 years:
- 2011- Bitcoin +1500%
- 2012- Bitcoin +299%
- 2013- Bitcoin +5400%
- 2014- USD +13%
- 2015- Bitcoin +37%
- 2016- Bitcoin +130%
These are outstanding payouts over a 5-year stretch for any asset, stock, bond, derivative, or currency. With bitcoin soaring again, the underlying computational network stronger and more secure than ever, and a multitude of reliable, user-friendly wallets services, applications, and resources arising, is it time for investors to take a more serious look at investing in Bitcoin?
Over the past 5 years, the grouping of major technology companies known as FANG (Facebook, Amazon, Netflix, and Google) stocks in total have performed well, with Amazon seeing 342.02% 5-year returns, and Netflix seeing an astounding 1156.9%, and Google seeing 148.36%. While these familiar companies garner a majority of the attention, a 5-year technical analysis demonstrates bitcoin’s long-term reliability, resilience, and propensity to provide significant returns for investors to outperform these traditional investments.
An investor who invested in Bitcoin 5 years ago would have seen total returns of 22,004%! Given the risks of investing in the new, formerly experimental, and open-source Bitcoin Blockchain technology, it would make sense that such strong long-run returns would arise.
The graph atop this page shows normalized 5-year returns of Bitcoin against the FANG stocks. There are 4 primary takeaways from that chart:
- Bitcoin is maturing as a retirement portfolio option: If an investor purchased bitcoin at any day other than a stretch of 11 days in late 2013, that investor would now be returning a profit. Because Bitcoin’s price started at near-0 and has shown so much fluctuation and growth, it has been difficult for the average investor to involve themselves confidently. These, however, are side-effects of pricing an emergent digital asset with no predecessor. Now that the market has increased liquidity, security, and regulatory guidance, a more mature bitcoin industry is encouraging wider adoption. Ecosystem-level metrics show that the Bitcoin network has been functioning well, as transactions per day have risen 258% over the past 2 years, while network participation fees and mining difficulty have grown similarly. In turn, investors should feel more confident in Bitcoin’s long-term viability and existence, as it cannot be easily shut down and incentives are not aligned among stakeholders for it to ‘go away’.
- FANG assets productive, Bitcoin more productive: A quick glance at the normalized chart above signals that, generally, Bitcoin has outperformed the overall strong FANG assets. While Amazon remains bullish, Bitcoin’s rise shows that its percentage-based returns have been stronger than any other asset class above.
- Bitcoin technical resilience: Bitcoin’s technical patterns of numerous ascending triangles in the graph above demonstrate the investment’s resilience to prosper even through multi-year downturns. Because there will only ever be 21 million bitcoins, the scarcity of the asset class, combined with increasing demand abroad, is making its medium-term growth a safer bet. Moreover, the rapidly rising mining difficulty on the bitcoin network puts additional upward pressure on the global exchange pricing so that miners, many of whom are based in China, can meet their operational costs.
- Bitcoin macro-economically hedges: Whereas the traditional assets and FANG stocks tend to cluster and correlate, bitcoin remains relatively independent of the traditional pressures such as end-of-quarter reporting, company performance, and institutional confidence of public stakeholders, which often distorts markets. Bitcoin provides an excellent hedge against potential downfalls of traditional assets and is a distributed, open source project with no centralized organization or authorities overseeing its governance.
Amazon vs. Bitcoin
The top-performing FANG asset, Amazon in particular, seems to be on the radar of many money managers for its investment potential in 2017. For example, Evercore recently named its Top Internet pick for 2017. When compared directly against Bitcoin, however, Amazon’s returns only outperform the digital currency in 1 out of 4 years. Christmas timed investments of $1000 yield Bitcoin’s returns outperforming Amazon significantly if entered in each year except 2013.
While many are scared away from Bitcoin at first, its performance as an investment speaks for itself. Bitcoin’s historical performance against an established player like Amazon is a bullish indicator that additional strong returns can follow in coming years.
Volatility of Bitcoin Decreasing
Another encouraging sign that signals maturity is the relatively lower daily returns volatility that the market has experienced in recent years. Bitcoin was previously perceived as an extremely volatile investment, and rightfully so. This trend, however, has lessened as the markets have matured.
Variation has decreased to levels more synonymous with traditional currencies, with daily standard deviations on returns having decreased from 5 to 10 per day from 2014 and before towards current levels under 2. This is likely due to deeper liquidity within exchanges, a more thorough understanding and use around Bitcoin, and overall confidence in the long-term viability of the network without panic-induced buying and selling. With lower variability, the asset takes on lower risk and becomes more comparable to the investment behavior seen in gold as a global hedge against currency collapses and negative market pressures.
Gold is down by 29.66% sitting at a near 5-year low. Conversely, Bitcoin is on the verge of being worth more than an ounce of gold for the first time ever, with gold at $1155 and bitcoin again trading at $969.00 at the time of writing. This is a significant shift away from traditional investing logic as well, as Bitcoin’s portability, security, and global nature are increasingly appealing to investors who may have otherwise looked towards gold or silver as a hedging investment.
Bitcoin, traditionally viewed as a “digital gold”, contains overlapping properties of limited scarcity and its resurgent rally combined with the relatively cheap price of gold shows that perhaps now is an opportunistic time to buy the two. Particularly as instability and uncertainty geopolitically may turn investors back towards both modern and digitally scarce stores of values in 2017 and beyond.
It is important to remember that Bitcoin is the breakthrough of 40 years of research in computer science, and in turn, this enables a new form of digital asset creation. Just as gold is scarce, these properties can be mirrored online.
Of surprise to many, the Bitcoin network itself has never been hacked. Yes, Bitcoin exchanges such as Bitfinex and Mt.Gox have been hacked, but these are now relics as Bitcoin service providers have matured towards sounder business practices. The Bitcoin network continues to function properly and securely itself due to an exponential increase in the network’s computing power, or “mining” difficulty.
Bitcoin derives its value as an investment vehicle and as a working, global store of value due to the electricity used to power a cryptographic hash function on the distributed Bitcoin Blockchain.
Why is bitcoin rising?
In summary, both sociological and technical signals are signaling that Bitcoin is not a technology that will “die” or go away. With the very real “War on cash” escalating in India (LINK), Australia, combined with an uncertain macroeconomic and geopolitical environment and a monetary crisis in Venezuela, conditions for Bitcoin’s demand-side reliability have heightened.
Bitcoin can provide a superior alternative for people in the developing world looking for reliable digital payment channels. Investor’s knowledge and awareness of Blockchain technology combined with market activity lend bitcoin to being an investment option with a mysterious, glowing glare. With Mr. Trump’s appointment of pro-gold and pro-bitcoin former Congressman Republican Mick Mulvaney to the Office of Budget and Management, there is more optimism in regulatory and entrepreneurial circles.
Even given these bullish indicators, Bitcoin is still an experimental technology. Investors should take time and due diligence to learn more about Bitcoin’s history, community, and technology before making the investment.
Do not be prepared to invest any more than you are willing to lose! Many believe that Bitcoin will either go “to the moon” and rise quickly, or eventually, geopolitical and regulatory pressures may cause users to flock elsewhere and drive the price to $0. Only time will tell, but in the present indicators are signaling that it may indeed finally be time to invest in Bitcoins.