Better Buy Right Now With $1,500: Bitcoin vs. an Index Fund

If you've got $1,500 on hand to invest, you'd want to capture at least some growth. The question is: How much risk are you willing to tolerate for that growth?

In that vein, it's worth thinking about whether to buy assets toward the riskier end of the spectrum, like Bitcoin (CRYPTO: BTC), or if it'd be smarter to buy somewhat safer assets, like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). There's a right answer here, so let's take a look at which option is a better use of your $1,500.

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The case for Bitcoin

Bitcoin's return profile is unlike anything else in the public markets.

Over the last three years, its price has increased by 236%, smashing the market's gain of 83%. At the same time, over the last 12 months, it's down by 15%, underperforming the market's growth of 22%. Its volatility runs 3 to 4 times that of U.S. stocks. But it's that asymmetry that makes a small allocation to Bitcoin quite useful.

Grayscale Research ran a handful of simulations and found that the Sharpe ratio, which is a calculated measure of risk-adjusted returns for a given portfolio, rises as Bitcoin is added to a traditional portfolio of 60% stocks and 40% bonds, with the benefit to risk-adjusted returns peaking near a Bitcoin allocation of 5% of the portfolio's value before leveling off.

Per a similar set of studies by Galaxy Asset Management, going from a 0% allocation to a 5% allocation to Bitcoin lifted annualized portfolio returns from 10.2% to 14.1% between 2020 and 2025, with only modest added volatility.

Even before considering the asset's investment thesis, which proposes that as a scarce store of value, it'll continue to be in demand despite less and less supply being mined, those data make for a powerful argument to buy and hold as much as 5% of your portfolio's value in Bitcoin, assuming your portfolio is already sufficiently diversified with other investments.

You should probably just buy an index fund

Let's not mince words here: If you're reading this, you will be well served by buying an index fund with your $1,500.

SPY's 20-year annualized return is around 10.7%. That's a powerful growth engine for compounding the value of your capital, and it gives you exposure to all of the largest public businesses in the U.S., which means it's also quite resilient against downturns in any specific company or sector. Furthermore, the price of the ETF that tracks the index is, at least in part, driven by the earnings and revenue growth performance of the stocks that make up the index.

The same can't be said for Bitcoin.

Therefore, unless you already have a diversified portfolio that has a hearty allocation to index funds, just buy the ETF that tracks the market. Once those bases are covered, only then should you grab a little Bitcoin on the side if you don't already own it.

Alex Carchidi has positions in Bitcoin and SPDR S&P 500 ETF Trust. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.