This time last year, cryptocurrency Bitcoin was all the rage. The price of a single coin had rocketed from under $1,000 in January to almost $9,000 by late November. By December, the price had more than doubled again, to just over $19,500.
While impressive by any standard, these gains could never be sustained over the long term. Sooner or later the bubble would burst and many people would be on the receiving end of a very harsh lesson on the dangers of following the crowd. As things turned out, we didn’t need to wait long.
Last week, a coin was yours for less than $4,000 — 80% less than it was about 11 months earlier. The speed of Bitcoin’s ascent was staggering but its fall was just as swift.
Quite why anyone other than a gambler would be interested in buying the cryptocurrency now given this kind of volatility is beyond me. In fact, here are three reasons why I think any rational investor should favour following the market’s top tier instead.
Shares rise over time
While clearly not devoid of risk, the stock market is a far safer choice since equity returns have been shown to outperform every other asset class over the long term.
Yes, there will be wobbles from time to time. The last couple of months have certainly been anything but easy. Yes, not all companies will thrive, or even survive, beyond the next few years. And yes, watching the FTSE 100 is considerably less entertaining than monitoring a crytocurrency’s value.
But investing shouldn’t be based on what’s exciting. Like Bitcoin, shares rise and fall in value over time based on supply and demand. Unlike Bitcoin, a stock’s value is also linked to a company’s ability to grow revenue and profits.
What does this mean? By this time next year, the cryptocurrency could be worth a whole lot more or perhaps even nothing based purely on speculation. A disorderly Brexit would be bad news for the FTSE 100 but its value is extremely unlikely to drop 80% in less than a year.
Get paid while you wait
In addition to rising in value over the long term, investing in the FTSE 100 index through a cheap tracker or exchange-traded fund earns you dividends. These payouts are either reinvested automatically (if you hold what are known as ‘accumulation’ units) or paid into your account for you to do as you please.
If you plan on staying invested for years and wish to benefit from the beauty of compounding, you’d be very wise to opt for the former. If you’re already retired then you may wish to use these payouts as a way of supplementing the State Pension.
Bitcoin generates zero income for its holders.
Placing all your hope in a single ‘asset’ — especially one that has no underlying value — is not a strategy we endorse at the Fool.
The beauty of tracking an index like the FTSE 100 is that you are protected from disaster. The fact that your capital is dispersed among a group of companies — in this case, the biggest listed firms on the London Stock Exchange — means those that experience difficulties should be balanced by those that do better. You are, in short, diversified.
It’s only during troubled times that we learn how important this really is.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.