If you invested $1,000 in Bitcoin 5 years ago, this is the amount you would have now

Investing in indices is a great approach, but you can do better with specific stocks or cryptocurrencies from time to time.

Let’s say you invested $1,000 in an index fund that tracks… Standard & Poor’s 500 (^GSBC -0.37%) Index 5 years ago. the SPDR S&P 500 ETF (spy -0.37%) It is a popular option with minimal management fees and an excellent history of reversing the chosen index.

If you reinvest dividends into more shares of the exchange-traded fund (ETF) over time, you will now have doubled your money. This represents an average annual return of 15% – much higher than the 10-year average of 12% or the 10% annual return since the ETF was introduced 41 years ago.

It’s easy to see why The Motley Fool recommends holding a diversified stock portfolio for the long term, in the spirit of index fund pioneer John Bogle and master investor Warren Buffett. I mean, good luck finding a savings account with a fixed interest rate of 10%, let alone the higher gains in recent years. Diversified investing is a proven strategy for building and protecting your wealth over the long term.

But what if you get $1000 from… Bitcoin (BTC 0.27%) Symbols five years ago? The largest cryptocurrency was in the middle of another crypto winter at the time, hampered by hacking scandals and regulatory crackdowns with no support to speak of from big banks and other financial institutions. The record $19,345 price of the Bitcoin boom in 2017 seemed like a distant memory, as it fell to $3,644 per token.

Bitcoin’s Rocky Five-Year Gains

As it turns out, that was a solid buying window for investors looking to commit their money over a five-year period. A $1,000 Bitcoin investment on January 15, 2019 would have been worth $11,540 at the time of writing exactly five years later:

Bitcoin price data by YCharts

It hasn’t been a smooth ride, but the overall improvement over five years is undeniable. In this period, Bitcoin investors have faced more hacks on cryptocurrency exchanges, the coronavirus health crisis, rising global inflation, and other challenges. Bitcoin prices fell more than 10% in August 2023, not to mention six one-month declines of that size in 2022. The previous chart includes all of these headwinds and collapses.

The road ahead: bumpy but full of hope

However, Bitcoin has gotten back on its digital feet with more gains than losses in recent months and a strong list of upcoming catalysts for further gains.

• The next Bitcoin halving – a regularly scheduled increase in computing power needed to mine new bitcoins – is scheduled for April 2024. These events are usually followed by a strong rise in Bitcoin prices over the next two years.
• US regulators recently approved 11 applications for ETFs based on Bitcoin spot market prices. The approval did not lead to a sharp increase in prices, but with easier access to Bitcoin-based investment instruments such as ARK 21Shares Bitcoin ETF (ARKB -0.80%) And iShares Bitcoin Trust (Ebit -1.00%) Trading volume should eventually increase and support a rise in Bitcoin prices.
• The regulatory picture is beginning to clear up, driven by renewed public interest in the cryptocurrency space and progress in important legal cases such as US Securities and Exchange Commission v. US Securities and Exchange Commission. ripple (XRP 0.09%). The wheels of fairness and regulation are moving slowly, and I don’t expect a full rulebook to come out in 2024 or 2025. However, every step toward clarity is good news, even if it’s not always taken downward. Taxes and increased investor access to cryptocurrency assets.

The overall long-term trend tends to leave traditional stock market indices like the S&P 500 far behind. Furthermore, the market’s bullish trend should continue over the next couple of years due to the technology, market, and regulatory events mentioned above – with the caveat that there could be significant price declines along the way for a myriad of unforeseen reasons.

So Bitcoin is not a magic ticket to automatic investment gains, with a high risk of sudden fluctuations and long periods of stalled or negative returns. Sticking with a market tracker like the SPDR S&P 500 ETF may be a better option if you’re not prepared for the volatility and technical quirks of Bitcoin investing.

However, it is a powerful digital currency with an unpredictable and promising future, and I think a modest position in Bitcoin (or one of the Bitcoin-based ETFs) would be a healthy addition to a diversified portfolio.