Bitcoin's return in 2017 was 60 times that of the S&P 500

Bitcoin hit a record high of $4,483.55 yesterday, and although it has fallen by several hundred dollars, its performance this year is still amazing.

The time span of Bitcoin's rise is impressive. Compared with the same period last year, Bitcoin has risen by about 600%, and it has risen by about 150% in the past 100 days. Six months ago (Valentine's Day 2017), the price of Bitcoin just exceeded the $1,000 mark. Even if the current BTC price has fallen, it has now quadrupled compared to six months ago.

This rate of return sounds a bit shocking, but how crazy is its performance? Let's compare it with other asset classes.

One way to do this is to compare stock market returns with Bitcoin returns.

How big is the increase?

A good way to measure traditional stock market returns is through the S&P 500 index, which professional investors often use as a benchmark for measuring investments.

We believe that over the past 90 years, the average annual return of the S&P 500 has been only 9.8%.

If we compare Bitcoin's performance this year with the average return of the S&P 500, it is clear that Bitcoin's return is 60 times the S&P 500's annual average return.

For another comparison, let's look at how long it took the S&P 500 to grow to its current level. At press time, the S&P 500 was around 2466, minus half that, which is 1233.

The last time the S&P 500 was below 1,233 was in 2010. That means it took nearly seven years for the S&P 500 to double, nearly 30 times the time it took Bitcoin.

When we compare the performance of Bitcoin to that of specific industries, Bitcoin’s performance remains amazing.

For example, over the past year, the top three stock sectors were finance, technology, and industry.

According to data provided by Standard & Poor's industry-tracking Spyder ETFs, financials have returned 29.5% over the past 12 months, while technology has returned 23% and industrials have returned 17.1%.

So, on a trailing twelve month basis, even if you were lucky enough to pick the best performing sector, Bitcoin would outperform the ETF in that sector by about 20 times.

However, if investors had chosen other sectors such as energy and real estate (the two worst performing sectors in the past 12 months), they would have lost 7.2% and 4.1% respectively.

How great is the risk of falling prices?

Although the rise of Bitcoin sounds very encouraging, it also has a very high risk of falling.

One of the advantages of investing in a broad range of stocks through the S&P 500 is diversification.

The S&P 500 is a basket of 500 companies that includes the largest publicly traded companies in the United States.

The S&P 500 has stocks from 11 different industry sectors, covering 24 different industry groups. This diversification means that investors' risk is spread out.

Bitcoin, on the other hand, is a single asset investment. In a sense, investing in Bitcoin is similar to investing in a single stock.

Although this metaphor may not be enough. (What you are really investing in is a single technology implementation, a single instance of code)

This means that investing in Bitcoin greatly concentrates your risk compared to the S&P 500, which is what we are seeing today.

However, this is not to say that investing in the S&P 500 will ensure that investors will not lose money.

Investors can lose money investing in stocks, even if they invest in an index to diversify their risk (such as the S&P 500).

The S&P 500 has fallen several times over the past 89 years, with the biggest loss suffered by stock investors in 1931, when the S&P 500 fell nearly 44% during the Great Depression. In the 2008 economic crisis, the S&P 500 suffered a very severe loss, falling nearly 36.5%.

Proceed with caution

Bitcoin has only been around for eight and a half years, and it was not until early 2013 that it was truly viewed by the public as an investment tool.

One thing we know for sure about Bitcoin is that it does not have a long enough track record for investors to understand long-term historical price patterns.

In the absence of such historical data, unless there are surprises, this should be a signal that investors and potential investors need to be wary of.

Bitcoin and blockchain are exciting technologies, but investors shouldn't get carried away.