Standard & Poor 500, S&P 500, and Bitcoin are some of the most popular financial instruments. While the S&P 500 is a market index that tracks the performance of 500 of the largest companies in the U.S., Bitcoin is a digital currency that runs on blockchain technology.

As Bitcoin continues to gain more attention from traditional investors, there has been a gradual shift from strictly investing in traditional financial assets like stocks to investors expanding their portfolios to include Bitcoin and other cryptocurrencies. Hence, we will compare two standard investment options: Bitcoin and S&P 500.

History of Bitcoin

Bitcoin, the first cryptocurrency, was first introduced to the world when the Pseudonymous personality, Satoshi Nakamoto, released on October 31, 2008, Bitcoin’s whitepaper titled Bitcoin: A peer-to-peer Electronic Cash System. The whitepaper outlined the technical details about Bitcoin, including the technology on which it was built.

On January 3, 2009, Satoshi Nakamoto mined Bitcoin’s first block, the Genesis block, which paved the way for “blockchain mining” among cryptocurrency enthusiasts. After mining the Genesis block, Satoshi Nakomoto carried out the first transaction on the Bitcoin blockchain when he transferred 10 Bitcoins to Hal Finney, a computer scientist.

Features of Bitcoin: Decentralization, Transparency and Immutability

Decentralization

Decentralization is one of Bitcoin’s core features. Unlike traditional fiat currency, whose supply, distribution, and usage are controlled by a central authority, usually a central bank, Bitcoin is not regulated by the government or any other central authority.

Instead, it runs on a network of nodes that work independently of each other and are controlled by a consensus mechanism. A node is simply a computer within a blockchain network. This means the Bitcoin blockchain network comprises a collection of different nodes or computers.

Since the nodes in the Bitcoin blockchain network work by consensus, their activity cannot be controlled by a central authority, making Bitcoin a highly decentralized digital currency.

Transparency and Immutability

Bitcoin is a distributed ledger. This means that all transactions in the Bitcoin network are recorded and stored in the Bitcoin blockchain, which is distributed across the network’s nodes.

Since these transactions are distributed, all the Bitcoin network nodes hold the exact copy for each transaction. Since this copy is distributed across all the nodes or computers, altering past Bitcoin transactions is difficult, as this won’t go unnoticed.

This makes Bitcoin, therefore, highly transparent and immutable. This is a big contrast with traditional institutions, which are filled with corrupt practices due to the ease at which bad actors can alter or manipulate recorded transactions.

History of the S&P 500

Source: spglobal.com

S&P 500, or Standard & Poor 500, is a stock market index introduced in 1957 to track the stock value of 500 of the largest U.S. corporations listed on the New York Stock Exchange (NYSE) and Nasdaq.

While the S&P 500 comprises companies from different sectors of the economy, before a company can be added to the S&P 500 index, it must have a market capitalization of at least $12.7 billion, among other requirements.

As a bellwether representation of the U.S. economy, the S&P 500 is a leading indicator that provides a reliable overview of its performance. Since the S&P 500 is a market index, its index value is the sum of the market capitalization of the stocks of all 500 companies divided by a factor, often referred to as the index divisor.

After its launch in 1957, the S&P 500 index rose slightly above 100 within the first ten years. This uprise in the index value was due to the economic boom that followed World War ll.

Shortly after, the index value declined between 1969 and early 1981 because the U.S. economy struggled with high inflation and stagnant growth. To deal with this economic downturn, the U.S. Federal Reserve raised interest rates, thereby curbing the high inflation, ultimately leading to the rise of stock prices, including the S&P 500 index price.

The next few years, between 1982 and 1999, were a period of bull run, during which the S&P market index continued to rise. However, this bull run ended when the bubble burst of 2000 happened. While the S&P 500 suffered a lesser hit, the tech-centric Nasdaq suffered a severe hit. Nevertheless, the S&P 500 index eventually recovered and attained a new high in 2007.

However, this gain did not last for too long, as it was reversed by the financial crisis or Great Recession in 2009. This led to the S&P 500 index’s biggest fall since World War ll. However, by March 2023, the S&P 500 recovered from all of its losses, with its index reaching a new all-time high. This price gain continued for the next seven years.

Due to the effect of the COVID-19 pandemic worldwide, the S&P 500 index value plummeted from 3,386.15 on Feb 19, 2020, to 2,237.40 on March 23, 2020 – a 34% drop. However, this did not last for too long as the index value of the S&P 500 rose back in August 2020, thanks to the practical economic strategy implemented by the U.S. Federal Reserve.

Features of the S&P 500: Wide Diversity and Re-balancing

Wide Diversity

The S&P 500 diversifies investments across different sectors of the U.S. economy, broadly representing how the largest 500 companies in the U.S. are performing. That is why it is ideal for risk-averse investors looking to hold a position in the long run.

When an investor holds a position, it means the investor purchases a financial asset, such as stocks, and decides to keep it in their investment portfolio for a long time without the intention of selling soon. The goal is often to profit when the asset increases in value.

Re-balancing

Although the S&P 500 index comprises companies from different sectors, it regularly re-balances itself, removing from its index or listing companies that perform poorly, thus helping investors get the most benefits from their investment.

While the S&P index tends to be predominantly filled with tech-centric companies, re-balancing the S&P 500 index helps keep this in check, maintaining its diversity and ensuring that companies from all sectors of the economy are included in the index.

Similarities between Bitcoin and S&P 500: Strong Performance During Loose Monetary Policy and Easy Accessibility

Strong Performance During Loose Monetary Policy

Bitcoin and the S&P 500 index tend to excel during periods of loose monetary policy. During these periods, a country’s central or apex bank usually implements several economic strategies to stimulate economic growth.

Common among this strategy is the purchase of government bonds and other securities that ultimately lower the interest rate, injecting more liquidity or supply of money into the economy. This strategy often works, as businesses and individuals are often moved to secure loans that are often given at much lower interest rates.

To illustrate the effect of loose monetary policy on the S&P 500 and Bitcoin, consider what happened in 2020 when the COVID-19 pandemic struck the world. Because the pandemic was beginning to have a downturn and adverse effect on businesses, the United States Federal Reserve took some drastic but practical steps.

To revitalize and strengthen the economy, the U.S. Federal Reserve purchased large quantities of government bonds and mortgage-backed securities, purchasing securities worth billions of dollars within a few months.

This action pumped more liquidity into the economy, increasing the flow of money and lowering the interest rates on loans. Businesses, in turn, leveraged and benefitted from this, ultimately causing the stock prices of companies like Zoom and Peloton to reach an all-time high.

The loose monetary policy benefited the S&P index, which recovered from its dip at the start of the pandemic in February 2022. Since money flowed in the economy, crypto traders and investors began injecting more funds into the cryptocurrency market, purchasing and trading more Bitcoins.

This action benefitted the cryptocurrency market, as Bitcoin’s price increased from about $7,000 at the start of 2020 to more than $28,000 by the end of 2020 before reaching a new high of $69,000 in April 2021.

Easy Accessibility

Bitcoin and the S&P 500 have become widely and easily accessible. Rather than going through the rigorous and lengthy process of calling their brokerages to help them execute trades, stock traders can now quickly and conveniently trade the S&P 500 index and its related stocks.

The availability of Centralized and decentralized exchanges has also made it very easy for traders to purchase or get Bitcoin and all sorts of Bitcoin-related trading pairs and derivatives. To purchase and start trading Bitcoin or any related trading pairs, visit Gate.io.

In addition, the creation of Bitcoin Exchange Traded Funds (ETFs) has also made it possible for traditional investors to gain exposure to Bitcoin without owning or trading it.

Differences between Bitcoin and S&P 500: Degree of Diversification and Exposure, Volatility

Degree of Diversification and Exposure

One key difference between Bitcoin and the S&P 500 is that while Bitcoin gives investors 100% exposure to just an asset, the digital currency itself, the S&P 500, offers investors a broader and more diversified exposure to how the stocks of different companies are performing.

The wider exposure the S&P 500 index provides is why risk-averse traders opt-in, especially when they want to hold a position for a long time and make profits.

Volatility

Volatility is the degree to which the price of an asset changes, that is, how much and how quickly the price of an asset goes up or down. Although Bitcoin tends to offer more investing rewards than the S&P 500, it is very volatile.

To illustrate the volatility of Bitcoin, consider what happened to the price of Bitcoin in April 2022. While Bitcoin showed upward moves, reaching upward of about $46,922.75…

Source: Coingecko.com

However, barely two months later, its price plummeted drastically, reaching a significant low of about $17,760.77, a more than 62% decline.

Source: Coingecko.com

Conversely, the S&P 500 index is far less volatile than Bitcoin. Although its annual performance may not be as good as that of Bitcoin due to its track record of consistency and far less volatility, the S&P 500 index is the go-to investment option for risk-averse traders.

Conclusion

Bitcoin and the S&P 500 are two distinct investment options, each with unique benefits. Bitcoin offers decentralization, transparency, and immutability, appealing to those seeking exposure to cryptocurrency.

In contrast, the S&P 500 provides wide diversity and re-balancing, making it suitable for risk-averse investors seeking long-term growth. While both assets excel during loose monetary policies and offer easy accessibility, they differ significantly in diversification, exposure, and volatility.

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