One thing you definitely don’t get when you put your money into Bitcoin is a dividend. And that’s a shame because dividends from the stock market are one of the great wealth creators that exist in the world of finance.
The enterprises behind shares produce goods and services that earn incoming cash flow, and the directors of the companies pay out some of the firms’ profits every year in the form of a dividend to investors. The dividends tend to keep on coming year after year, and they also tend to go up a bit annually. So not only do you get a stream of income when you own shares, you also tend to get an income that grows.
The wonder of compounding
Even bank account interest doesn’t grow. You usually get a fixed interest rate no matter how long you leave your money in the account, although bank interest rates do tend to rise and fall over time along with base interest rates. But interest in a bank account does compound your money. If you leave the interest you earn in the account, you’ll then get interest on the original money and on the interest and so on. Indeed, compounding is the great wonder of mathematics that has the potential to make you rich over time.
You can achieve compounding with share investments too, by reinvesting those already growing dividends back into the shares. Then you’ll get dividends on the original money you invested and on the reinvested dividends and so on. But it can get even better with shares because, as the underlying businesses expand, share prices tend to go up, which gives you growth in your original invested capital as well.
Shares really are packed with wealth-creating potential, and it’s all because of the cash-earning businesses that back them. But Bitcoin has none of that. It can’t pay you a dividend, or generate any incoming cash flow, or own any tangible assets, or add value to any product or service to generate wealth. If you put money into Bitcoin, it’s really just speculating and that could go either way.
Great risk in Bitcoin and some super shares instead
Of course, Bitcoin shot up by hundreds of percent from 2015 through to 2017 making some people a lot of money. But in 2018, much of that speculative bubble deflated again. I think that price history attracts people to the cryptocurrency now in the hope the price will shoot back up to where it was before, near $20,000. However, even now Bitcoin remains hundreds of percent above where it was in early 2015, and I think the downside risk looks huge. If you go into Bitcoin now, I reckon there’s a chance you could end up losing more than 90% of your money if the price goes back down to where it was four years ago.
Instead, I’d invest in dividend-paying FTSE 100 shares backed by strong, defensive businesses such as GlaxoSmithKline, National Grid, Unilever, Severn Trent, Reckitt Benckiser Group and AstraZeneca. And I’d also look at companies in the FTSE 250 index such as Britvic and PZ Cussons. Investing in those firms would get me on the road to compounding, and I think they’re a better bet than Bitcoin.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Britvic, GlaxoSmithKline, and Unilever. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended AstraZeneca. 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.