Compound Annual Growth Rate, or CAGR, is a very intriguing metric to assess market strength. The rate of return one can achieve by reinvesting profits every year is astronomical for some markets. So no one will be surprised to see Bitcoin is miles ahead of the competition, including gold and the SPY.
Why The CAGR Is Very Promising
Bitcoin is a cryptocurrency that has been around for a while now. Since July 18, 2010, most people track this price when one BTC was priced at just $0.09. Considering that the same BTC is worth $32,000 today, it is safe to say the world’s leading cryptocurrency has an exciting journey. Its price growth has been remarkable over the past 11 years and shows no immediate signs of slowing down either. However, not everyone had the chance to invest at such a low price, forcing them to explore other market options at their disposal.
Although the “buy and hold” approach works wonders with Bitcoin most times, some investors prefer a different approach. Exploring the Compound Annual Growth Rate, or CAGR, paints an exciting picture. The concept revolves around using early profits and reinvesting them at the end of each year. As a result, it is a good way to calculate returns for anything that can rise or fall in value.
As Bitcoin is perhaps the most volatile financial instrument on the market, CAGR can paint a unique picture. It is also a metric to determine how well one market performs another over the same length. However, it does not reflect investment risk as committing money to any financial market will carry an inherent risk. There is never a guarantee for profit, either short-term or long-term.
Moreover, the CAGR doesn’t depict whether the approach of reinvesting profit every year would be successful or not. Every market behaves differently, and for some, reinvesting profit can be counterproductive and yield a much lower profit or even a loss. Taking Bitcoin as an example, it can be worthwhile to perform CAGR. However, those who bought and held for years will see a much higher profit. Even so, its CAGR – the average yearly return based on historical performance – is still out of this world.
CAGR for Bitcoin, Gold, And SPY
As many people like to compare Bitcoin to gold, it is worthwhile to compare their CAGR rates. Assuming an investment from July 18. 2010 until July 20, 2021, investors would have held either BTC or gold for 11 years. Moreover, they would have reinvested their profit at the end of the year. The CAGR per year for gold is just 3%, which is still better than using a savings account. However, it is far from a spectacular annual growth, mainly because the value of gold has been bearish from 2013 to late 2018.
Looking at the SPY, it has noted phenomenal growth since 2010. It is a near straight upward curve, except for a sharp dip in 2020. Compounding one’s yearly earnings and reinvesting them allows for a CAGR of 16%. Much higher than gold, which is widely considered one of the more appealing and “stable” investments. However, the SPY has not had a lengthy bearish period – although that situation may change in the future.
Bitcoin remains the outlier in this regard, although in a somewhat surprising manner. Its CAGR per year is still 218%, which is astronomical compared to the other two markets. Moreover, even with this year’s strong price dip, that rate will not change by much. Bitcoin and other crypto assets saw a “crypto winter” from 2018 to mid-2020. Even that period did not diminish the CAGR much. With cryptocurrencies, it is essential to look at the bigger picture at all times.