Bitcoin is considered by many to be digital gold. Yes, it was originally meant to be an alternative to fiat currency when the blockchain mined its genesis block back in 2009. However, what the world has learned over the last 12 years since the whitepaper was published is that many people treat it as an investment. Hardcore libertarians who are antigovernment and anti-central authority think it’s a great hedge against a steep economic downturn or a sudden change in government control.
That’s what the world is currently experiencing thanks to the coronavirus pandemic. It’s also why now is as good a time as any to answer the question once and for all: Does Bitcoin actually work well as an alternative investment?
In order to answer that question we have to do what billionaire hedge fund managers and stock market analysts do everyday, every week, every month, every quarter and every year. Bitcoin must be measured against specific benchmarks, just like stocks are measured against major indices like the S&P 500 (which is an index fund representing the total value of the 500 wealthiest companies in the United States) or the Dow Jones industrial Average.
There’s only one inherent challenge with that. Indices like the S&P 500 are worth between $28 trillion and $30 trillion at any given time and a stock like Walmart doesn’t fluctuate nearly as much as Bitcoin. Therefore it’s not enough to compare Bitcoin to the stock market. Comparisons to other alternative forms of investment are important to make as well. After all, there are indeed a million ways to make a million dollars!
At the end of the day, the smartest approach to investing is to diversify your portfolio, regardless of the asset class. So let’s compare Bitcoin not only to traditional investments like stocks. Let’s also compare it to other alternative assets like gold, art & collectibles, wine and scotch. But first, let’s talk about why alternative investments are valuable during an economic slump.
What image comes to mind when you picture a hedge fund manager? Odds are you think of a smart, analytically gifted, wealthy investor in a three-piece suit who makes a lot of money. But what exactly is a hedge fund manager’s job?
Yes, his/her job is to make a lot of money for investors. So why aren’t they just called profiteers or stock market analysts? That’s because hedge fund managers manage large amounts of wealth and their job specifically is to hedge against risk. In order to do that, they have to consider all kinds of asset classes, and ultimately, their job is to make money for their clients whether the market is going up or down.
That’s exactly why it’s important to consider alternative investments during an economic downturn. It’s a way to hedge against the possibility of losing money. The richest investors in the world understand this better than anyone else.
Think about it this way. Imagine that you have a $100. You decide to take a big gamble on a penny stock and you lose 90% of the money. You now have $10. Now your goal is to make it back to $100. What percentage in gains do you need to earn in order to get back to $100? The answer is 1,000%. It doesn’t take a hedge fund manager or investing experts to know that it is a lot easier to avoid losing 90% than it is to guarantee oneself a 1,000% return. That’s why pursuing alternative investments is crucial during economic downturns.
The good news is there are many different types of alternative investments worth considering whenever the economy is struggling.
There are a plethora of possibilities when it comes to choosing alternative investments outside of stocks, bonds and mutual funds during a recession or depression. Gold and other precious metals are always a popular choice. Believe it or not, so are works of art and other collectibles like coins (they are made of precious metals after all). There is also the option to invest in alcohol. Not beer or liquor though. Specifically wine or whiskey. It’s true, investors can make a lot of money buying, selling and curating barrels of whiskey. Even maple syrup is a worthwhile investment valuable enough to make people rich. Then of course there is always a good old real estate. It’s far from what anyone would consider an alternative investment per se, but definitely a favourite during lean economic times.
Gold and other precious metals tend to rise in value when the rest of the economy is struggling. That’s because gold is considered by many to be the only physical object throughout history that has any real material value. Long ago it was used as currency, but even apart from that, gold provides many other use cases. It can be used to produce many industrial materials and it’s a key ingredient used in many of today’s high-end smartphones, laptops and tablets, otherwise known as things our service-based economies and the future “smart cities” societies will build that humanity can no longer live without.
The price of gold is up more than 33% over the past year, and more than 42% over the past five years. Compare that to the S&P 500, which stood at just over 2,100 points on May 1, 2016 and hovered around 2,800 points on May 1, 2020. That’s a return of just under 35%.
Given the historical performance of both gold and the top 500 U.S. stocks, it can be said that gold is leading the benchmark for the last five years and therefore makes for a solid alternative investment regardless of whether the broader market is going up or down.
According to investing.com, blue-chip paintings from the world’s most renowned artists, including Monèt, Pablo Picasso, Andy Warhol, Jean Michel-Basquiat and the like, works of art have topped the S&P 500 by more than 250% since the year 2000. The average annual return on the stock market is about 10%, so if you find an alternative investment that earns you 250% or more above the benchmark over 20 years, you’re doing incredibly well.
So why is it that pieces of art hold up so well over the long term? The answer to that is simple. All of the artists mentioned above have passed away. Beyond the fact that they each have their own unique style and they all had their own sense of artistry and meaning behind the works they created, the bottom line is all of the artists mentioned above are no longer with us. Anybody who owns a piece of their original works literally owns a piece of history that can never be created again.
Another important thing to consider is the fact that the correlation between artwork and equities markets is low, meaning that when stocks go down in value, fine works of art are very much likely to retain their value. The funny thing is, investors don’t necessarily have to be millionaires or veer too far away from the blockchain in order to own a piece of artistic history.
Masterworks.io is a website that allows small time investors to pull together their money using the blockchain to invest in multi-million-dollar works of art. The company uses the Ethereum network and smart contracts to guarantee investors their own stake in a painting starting with a low minimum investment.
Earning a profit worth 250% than the most followed stock market index in the world over the last 20 years is quite an accomplishment for an investor. Anybody would be happy with that kind of a return. Is it possible that investing in fine wine is an even better alternative to securities then art or gold? You better believe it!
Since January 2003, red Burgundy wine specifically has beat the S&P 500 by nearly 500%. Burgundy is considered the holy grail of all the different kinds of wine in existence. It’s a kind of wind that’s for the true connoisseur of fermented grapes.
Fine wine is kind of like fine art. Only people who have a special appreciation for it (known as oenophiles, or in urban dictionary terms, wineos) really understand its value. But even the casual drinker knows that a wine has to be aged to perfection. Generally speaking, the longer and more robust the aging process, the more valuable the wine is. It doesn’t take an expert to know that generally speaking, the amount of effort involved to create something increases what the end of value is to the consumer.
Another major factor in determining the value of wine is how industry critics rate a particular type of wine on a predetermined scale. The better the ratings from the most respected critics in the wine tasting industry, the higher the cost for the bottle or type. No matter how that price is determined, the bottom line is investing in a good bottle of red Burgundy or Bordeaux might actually put you ahead of the stock market in the long run, and by a wide margin.
Alas, it’s time to compare Bitcoin to gold, highbrow art, and fine wine. How does the world’s first truly decentralized currency stack up against the rest?
To be honest, it’s not even a fair fight. The thing is gold, Picasso paintings and fine wines have all been around much longer than Bitcoin. It’s been a long time since any of those other forms of investing were considered a ‘new asset class’. The explosion of Bitcoin’s price compares more to the.com bubble of the late 1990s and early 2000’s than it does to fine wines or anything else.
On the other hand, while it is important to take this comparison with a grain of salt, at the end of the day and investors goal is to make as much money as possible regardless of the vehicle being used to produce the profit.
When the Bitcoin blockchain first launched, full Bitcoin’s could be had for mere pennies. Even in the latter quarter of 2013, a full Bitcoin could be had for less than $125 USD. Consider for a moment that the present value of one Bitcoin at the time of this writing is closer to $8,800 USD. That’s a whopping rate of return of over 7,000% in less than eight years. There isn’t a single investment in the world that can compete with that. That said, it’s safe to say that given the world is now 12 years into the Bitcoin experiment, the advantage of being a first mover is getting smaller and smaller. Bitcoin is not a secret anymore. That leaves one question left to be answered. As Bitcoin still a good investment in 2020?
Investing in Bitcoin isn’t for the faint of heart. Just to this point in 2020 so far, investors have seen the price plummet from $11,000 USD down to $3,100 USD by March and now sitting back up at $8,800 USD, all in the span of four months. The volatility has to do with both the coronavirus pandemic and the fast approaching Bitcoin halving event, which cuts the new supply of Bitcoin’s entering circulation in half once the next set of 210,000 blocks his mind in the coming days.
That said, any astute investor will agree. Even the richest investors like Warren Buffett. Nobody knows what the market will do at any given time. The important thing to do is to have an investing strategy rife with clear principles and guidelines that suit one’s risk tolerance, and a clear understanding of fundamental and technical analysis. Those that stick to a game plan will turn a profit in the long run regardless of which vehicle they choose.
So although Bitcoin is proving to be a great investment so far in 2020, historical performance doesn’t always offer a fair prediction of future results, and nobody really knows what the next six or seven months of the year hold for its price. The reality is that’s too short of an investing horizon. The best thing an investor can do at the end of the day is choose their investments as if they are going to hold them for a decade. Operating with that mindset can make nearly anyone a winner in the long term.
Those ready to buy and hold Bitcoin and other digital assets and committed to holding them in their portfolio for the long run can start by purchasing coins at Bitbuy. It’s free to register and easy to get verified, and purchasing digital assets can be done conveniently and instantly all in one place.
DISCLAIMER: The analysis provided in this article is for educational purposes and should not be considered an investment recommendation, All examples and analysis are provided by the writer, and not Bitbuy. All analysis and opinions are that of the writer and not Bitbuy.
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