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Good morning everyone,

Last weekend I channeled the boomer in me and bought a newspaper.

Newspapers, in case you're unfamiliar, are those piles of paper delivered by paperboys on bicycles that give you inky fingers and are great for cleaning windows.

Having trained as a journalist, I sometimes get nostalgic and buy one.

This story caught my eye:

Sorry about the grease stains, I can't remember what I ate, but it must have been delicious.

Let's dissect what we're being shown here.

DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.

Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Don’t forget to do your own research.

1. The beauty of index investing

The chart shows a comparison of the annualized returns of different asset classes over 30 years.

The data comes from US investment firm Vanguard, one of the world's largest providers of mutual funds and exchange-traded funds (ETFs). The company is a proponent of low-cost index investing, where one doesn't look for the needle in the haystack but buys the haystack.

Unsurprisingly, the best-performing asset class on an annualized basis over the past 30 years has been US equities.

The ranking is as follows:

• US shares: 11.1% pa

• Australian shares: 9.1% pa

• International shares: 8.2% pa

• Australian property: 7.8% pa

• Australian bonds: 5.6% pa

• Cash: 4.2% pa

Everything has outperformed cash, shares have outperformed bonds, and US shares have outperformed Australian shares. If you follow the capital markets, this should come as no surprise. Remember that 'US shares' here refers to the S&P 500 index, 'Australian shares' to the S&P/ASX All Ordinaries index, and so on.

Simply put, the chart is screaming: Buy a stock market index fund and stay the course, despite the COVID-19s and global financial crises of the world. That is if you have a long enough time horizon. Not everyone can afford to wait 30 years.

There is nothing wrong with this approach. I agree that if you want a low-cost, hassle-free approach, indexing is the best way to build wealth over time. I do it in my super, my Australian retirement account.

2. How bitcoin stacks up

Unfortunately, my boomer newspaper chart above does not show bitcoin's annualized rate of return.

Yes, bitcoin has only been around for 15 years, not 30. But hell, that's 15 years of data that could have been included.

I was curious about bitcoin's annualized growth rate. And since I didn't know it, I had to look it up.

Below is a comparison to US shares. Voila.

What you see is the average annual growth rate, also called the compound annual growth rate (CAGR), of the S&P 500, the best-performing asset class in Vanguard's dataset, compared to the CAGR of bitcoin between August 2011 and July 2024.

(Strictly speaking, we’re missing a bit of data here because bitcoin was introduced in 2009, but so be it.)

As you can see, bitcoin's 101% outperforms the S&P 500's 15% by almost seven times.

Take that, Vanguard.

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3. Hold for at least 4 years

Another interesting chart I found is this one.

The orange line is bitcoin's 4-year CAGR. In simple terms, this means that if you had bought bitcoin exactly 4 years ago, your CAGR as of this Wednesday would have been 51%.

The 4-year time horizon is linked to a larger catalyst that drives the crypto market: the bitcoin halving, which takes place every 4 years, reduces the amount of bitcoin that comes into circulation and ultimately leads to a significant increase in price.

Interestingly, bitcoin has never returned less than 20% on an annualized basis for a 4-year investment, no matter how badly timed.

Put simply, you can buy bitcoin at the all-time high in one cycle and still make a great return 4 years later.

4. Volatility does not equal risk

It's often said that bitcoin is too volatile to be considered an asset class worthy of consideration. Looking at bitcoin's returns, it is clear to me that this school of thought should be challenged.

Bitcoin is volatile because it is a novel asset class in price discovery that is traded around the clock and around the world. But just because it's volatile doesn't mean it's risky. Just make sure you allow enough time to recover from downward volatility.

Of course, past performance is no guarantee of future gains, as they say. But I agree with Jenny Johnson, CEO of Franklin Templeton, who believes that traditional finance is underestimating the enormous scale of bitcoin.

I believe that bitcoin will become a reserve asset like gold in the next few years. The genie is out of the bottle. And I believe that in another 15 years, bitcoin will be worth more than we can imagine today.

In a few months, I will complete my first 4-year investment cycle in bitcoin. I plan to cash in on a piece of my bitcoin pie. But for the rest of the pie, I plan to be around for a few more cycles.

Have a great weekend, everyone!

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