“Bitcoin has been volatile since its inception because there is no natural way to value it,” Chisholm said. “The amount was up to $20,000 because everyone heard the news and didn’t want to miss out. Then it went up to $3,000 and now it’s almost back to $10,000.
Investing involves risk. Markets can crash for many reasons. Companies can go bankrupt. Or in a positive sense, a stock can skyrocket over time. It’s important to consider risk when deciding to add different assets to your portfolio. “With individual action, there is risk,” Kirk Chisholm, an asset manager and alternative investment expert at Innovative Advisory Group, told The Balance by phone. “There’s a risk it won’t grow, the dividend could be cut, and many people compare performance to the S&P 500, which means you run the risk of trying to keep up with the Joneses.”
However, he emphasized, these are risks common to many investments. Stocks are different because there are signals you can use to understand where the price might move.
You can look at things like the ratio of a company’s stock price to its earnings (price-to-earnings ratio or P/E) to understand the company’s financial health.
David Stein, a former investment strategist and portfolio manager for a hedge fund, also told The Balance over the phone that Bitcoin lacks the predictive tools that stocks have. “Cryptocurrencies are speculative, based entirely on supply and demand,” Stein said. “To some extent, all currencies are based on what people are willing to pay, but that’s different with cryptocurrencies like Bitcoin. Unlike other currencies like the dollar or gold, this is a much smaller market in terms of overall size, and is therefore more susceptible to larger fluctuations.
Chisholm and Stein agree that Bitcoin is a relatively new development and has not yet been widely adopted. This adds another level of risk, as it could be replaced by other digital currencies that are more efficient or can be regulated. History of Bitcoin vs Stock history
While you can’t base future performance on the past, it is useful to look at how different investments have performed over time.
In 2015, Bitcoin prices fluctuated between 200 and 500 USD per coin. However, in 2017, the price increased dramatically, reaching a high of $19,891 in December, before falling below $3,500 in December 2018.1 In 2020 alone, Bitcoin prices rebounded from $3,858 on December 12. March to 9,074 USD on July 5.2.
The stock’s growth hasn’t been as impressive but has been more steady since 2015. The S&P 500 index remained around $2,000 at the start of 2015. Although there have been ups and downs since then, the S&P 500 remains in level of about 3,100 USD in July 2020.3
The Dow Jones Industrial Average (DJIA) fluctuated between $17,000 and $18,000 in early 2015. In December 2017, when Bitcoin peaked near $20,000, the DJIA stood at around $24,000. As of July 2020, the DJIA was at around $25,0004.
