The first half of 2019 has been highly profitable for holders of Bitcoin. The virtual currency has risen by over 200% since the turn of the year, with it now trading at over $11,000.
By contrast, the FTSE 100 is up by around 10% plus dividends, which is clearly a hugely inferior return when compared to the cryptocurrency.
While it may be tempting for investors to try and capitalise on improving sentiment for Bitcoin, the FTSE 100 could offer a superior risk/reward opportunity over the long run.
Although the price of Bitcoin may have risen sharply over the last six months, it continues to be a high-risk asset to hold. One reason for this is that its price is not linked to fundamentals, such as sales or profitability in the case of a company. Rather, it is solely based upon investor sentiment. As the past performance of the virtual currency has shown, this can change quickly and without clear reason. As such, it is possible that even though Bitcoin has made strong gains in recent months, its performance over the second half of 2019 may be far less impressive.
By contrast, the FTSE 100 offers far lower risks than the cryptocurrency. Its price level can be justified through focusing on the valuations of its members, which appear to be low at the present time. Moreover, an investor can build a portfolio of FTSE 100 stocks that helps to reduce overall risk through limiting company-specific risk. This could help to produce less volatility in the long run.
Bitcoin may now be far more popular among investors than it was six months ago, but its future remains highly opaque. There are lingering concerns among lawmakers regarding its security, and regulations could therefore change as it becomes more widely available. Such changes could cause a sharp shift in investor sentiment. Meanwhile, the potential for Bitcoin to eventually replace traditional currencies seems to be limited. Its lack of size and infrastructure could mean that it ultimately fails to become as popular among consumers as some investors had hoped.
The FTSE 100 has a long track record of consistent returns. Since inception, it has recorded an annualised total return of around 9%. While it has been outperformed by Bitcoin since the start of 2019, for an investor who is seeking to build wealth over a long time period the impact of compounding on annualised returns of 9% could be significant. And, with the index having a relatively high dividend yield at the present time, it seems to offer a wide margin of safety.
As such, now could be a good time to pivot from the virtual currency to the FTSE 100. Since the index offers a wide range of dividend and growth opportunities at the present time, it may produce relatively high returns at the same time as offering significantly less risk than holding the virtual currency over the long run.
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