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Is Bitcoin about to crash back down to $4,000? I’d buy this instead

Bitcoin’s resurgence this year, which took the cryptocurrency above $12,000 in June, looks remarkably similar on the chart to the surge that flirted with $20,000 in 2017.

You don’t need me to tell you that the 2017 peak was followed by a decline that bottomed out near $3,000 by the end of 2018. Could it happen again this time? I think it’s highly likely.

Both the peak in 2017 and the one we’ve just seen in June were closely followed by second attempts at the high point, which didn’t quite make it. That looks like classic reversal price action to me.

An engine for gains

And why shouldn’t the direction of the chart reverse? There’s nothing much driving movements in Bitcoin other than speculation itself. If you were fortunate enough to have ridden Bitcoin up this year, I bet you are tempted to lock in your gains now that the chart is showing weakness. And you won’t be the only one. The more the price drops, the more it will likely attract selling.

If things really pick up momentum, the price of Bitcoin could drop like a stone from where it is now.

The absence of meaningful fundamentals keeps me away from the cryptocurrencies. Instead, I’d rather invest in shares and share backed investment vehicles such as index tracker funds. Every share is backed by an enterprise that has the potential to generate value, and increases in value can drive share prices higher. You just don’t have that kind of engine driving gains in cryptos such as Bitcoin, which means any gains can lack staying power.

Powered by enterprise

Tracker funds can follow the fortunes of an entire share index, such as the Legal & General UK Mid-Cap Index Class 1 – Accumulation tracker, which tracks the FTSE 250 index. Mid-cap companies are some of the UK’s strongest public limited firms and many have the potential to grow into even larger enterprises.

The great thing about tracker funds like this is that as well as giving you diversified exposure to the underlying share-price movements, you also get dividend income generated by the underlying companies.

The example tracker fund above is the ‘accumulation’ version rather than the ‘income’ version. When the dividend income is accumulated it is rolled back into the fund for you automatically, which means you are on the road to compounding your investment. That’s important because the principle of compounding is key to building wealth.

By contrast, if you select the ‘income’ version, your dividends are paid directly to you, which can be useful, say, when you have retired. And you can switch from ‘accumulation’ to ‘income’ when you are ready. But one thing is certain, you don’t have such options if you invest in cryptocurrencies such as Bitcoin because they don’t pay you a dividend.

Your only hope of compounding your investment in cryptocurrencies is to time your buying and selling so that you make regular capital gains. But I think that is a very hard thing to achieve and share-based investments are likely to be a surer way of building your wealth.

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Kevin Godbold has no position in any share 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.