If you could only choose one investment to put all your money in between either stocks or cryptocurrency, which would you choose? The answer, of course, is that it depends!
That’s because time is a critical component of our decision. When are we investing? For how long are we investing? And, do we happen to have a crystal ball to see what is going to happen in the future? This whole time element is tricky and basically makes any variation of this question impossible to answer because no one can predict what’s going to happen down the road.
In the future, maybe everyone owns Bitcoin and it’s worth more than the entire stock market! Or, maybe someone discovers (or creates) a fatal flaw in Bitcoin’s design and it becomes worthless. Maybe in the future everyone decides to go back to trading with bear pelts and both Bitcoin and the stock market crash to zero!
Okay, okay, these situations are kind of extreme. But, I asked an extreme question. No one has to choose between two investments. There is no all or nothing.
When we look at history, despite knowing everything in hindsight, it’s still a difficult question to answer because it all depends on timing. That may sound dumb like “oh well of course I would have bought the perfect bottom or perfect top in hindsight” but use that logic to invest going forward and you will almost never hit the absolute peak or bottom of an investment. You will probably get burned thinking you found the peak or bottom and won’t realize your mistake until the market has run away from you. There are a lot of people in the game, what makes you so good (or lucky) to hit perfect market timing going forward and beat out everyone else? It’s not so easy.
At the very least, we can use history as a guide to look at how investments performed relative to each other. We can make a pretty simple chart to quickly see what has happened in the past and analyze that to maybe get some hints of a trend that might give us some insight into the future.
Bitcoin was definitely a better investment than the S&P 500 in 2017. You just had to make sure you got in and out before the crypto market crashed. Otherwise, you are looking at definite underperformance. Since the start of 2019 however, you’d have a bit of volatility but could argue Bitcoin has been the more lucrative place to be. Certainly the recent rise in price has helped the pro-Bitcoin camp.
Unfortunately for Bitcoin’s other alternative friends, the story isn’t as competitive. Ethereum hasn’t come anywhere close to its previous peak since the crash.
And, for Litecoin, things look even worse.
Now, again, I don’t have a crystal ball and the past is the past. While we can’t say for sure which investment you should choose going forward, the real answer is that you don’t have to go all or nothing.
Maybe Litecoin looks cheap relative to stocks to you. Maybe you still believe Bitcoin has room to run. Maybe you think that bear pelts are undervalued and are the real winner in all this.
You can create a portfolio with stocks, crypto, gold, bonds, bear pelts and more. Diversification will only help you navigate all these messy volatile periods of over or underperformance, especially since you don’t have perfect timing to hit the exact peaks and bottoms.
Now, I’m not usually one to give specific investment advice unless I feel strongly about something and believe it would be harmful to leave it out, but I’d avoid the bear pelts. And, while cryptocurrency is interesting, it’s not meant to be 100% of a portfolio.
I’ve done a lot of analysis in previous posts showing that 5-10% Bitcoin allocation might make sense for some people from a return-to-risk perspective but, despite my personal success investing in crypto in the last four years, I don’t think the average person should be holding more than 1-3%. That being said though, the volatile charts are certainly exciting to see and the future for crypto, whether up or down, is bound to be incredibly fascinating.
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