Investors have become increasingly upbeat since the start of the year. This has been evidenced by the FTSE 100’s rise of around 10%, while virtual currency Bitcoin has gained 35%.
Looking ahead, it would be unsurprising for recent trends to continue in the short run. However, in the long run, the FTSE 100 appears to offer a superior risk/reward ratio compared to Bitcoin. As such, it could be a better way of making a million.
While Bitcoin has made strong gains since the start of the year, it is an exceptionally volatile asset to hold. It fell by over 80% in under 18 months after reaching a high of $20,000 in late 2017. As such, for most investors, it could cause a significant amount of worry if investor sentiment declines.
Unlike investing in FTSE 100 shares, Bitcoin offers no fundamentals. It is therefore not possible to ascertain whether it offers good value for money or not. In a downturn, this can make a significant difference to an investor’s mindset.
During a FTSE 100 bear market, for example, an investor may gain in confidence from focusing on company valuations. They may decide to purchase a number of stocks on the basis that they are undervalued. Should the Bitcoin price fall, by contrast, investors may feel far less certain about their investment since it could still be hugely overpriced.
Furthermore, shares in companies represent small pieces of real businesses. Bitcoin is unlikely to become a mainstream currency due to its lack of infrastructure and limited size. As such, its potential to deliver high returns in the long run may be limited.
Even though the FTSE 100 has risen sharply since the start of the year, there are still a number of shares that appear to offer excellent value for money. The index trades on a dividend yield of just over 4%, which is historically high. Therefore, a number of sectors such as healthcare, tobacco and retail could continue to be cheap. They may offer long-term growth prospects, with their margins of safety providing a more enticing risk/reward ratio for investors.
While the FTSE 100 has experienced bear markets in the past, it has always recovered from them to post higher highs. Since its fortunes are linked to the performance of the world economy, holding a diverse portfolio of FTSE 100 shares is likely to lead to long-term growth that is higher than for most other mainstream assets.
By contrast, Bitcoin has a much more limited track record. Its performance is linked solely to investor sentiment, which could be impacted by a variety of factors including regulatory change and whether other virtual currencies become increasingly popular. Since it is impossible to factor in such risks to an asset that has no fundamentals, there is a danger that the cryptocurrency is riskier than it first appears.
Therefore, from a risk/reward perspective, the FTSE 100 could be a better way to make a million. Its returns in recent months may have been lower than those of Bitcoin, but its risks appear to be significantly less than those of the virtual currency.
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Peter Stephens 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.