Although the price of Bitcoin may have surged higher in 2019, it continues to offer an unclear outlook for investors. Risks such as a lack of fundamentals, the prospect of a change in sentiment, as well as the uncertainty regarding its potential to replace traditional currencies may weigh on its performance over the coming years.
As such, buying FTSE 250 shares could be a better idea. Not only do they provide greater diversity and lower risk than the virtual currency, they also offer strong growth potential in many cases.
With a track record of high annualised returns, as well as a relatively strong dividend yield, FTSE 250 stocks could be a better means of making a million than Bitcoin.
As mentioned, the outlook for Bitcoin remains uncertain despite its recent rise in price. There are a number of question marks surrounding the future of the cryptocurrency, with its lack of infrastructure and potentially limited size meaning that it may be unable to replace traditional currencies. This could cause a decline in demand among investors over the coming years.
Of course, since Bitcoin lacks fundamentals, a reduction in investor demand for the virtual currency would be likely to cause a drop in its price. Since investors have no way of knowing what it is worth, it is difficult to know at what price the virtual currency represents good value for money. A lack of a clear margin of safety may mean that investors are taking significant risks in buying Bitcoin, which could lead to disappointing returns in the long run.
By contrast, the FTSE 250 provides the opportunity to diversify across real businesses that have annual reports, as well as regular updates. This allows an investor to obtain a margin of safety when purchasing stocks, which could help to reduce risk over the long run.
Clearly, Bitcoin’s returns in 2019 have been superb. This trend could be repeated in future, but the track record of the virtual currency suggests that it is likely to exhibit a high degree of volatility.
Although FTSE 250 stocks may become increasingly volatile due in part to Brexit and the uncertainty facing the world economy at present, the index’s track record suggests that it offers a high and consistent long-term return. For example, in the last 20 years it has recorded an annualised total return of 9% which, when compounded, could make it easier to produce a £1m portfolio.
In fact, £600 invested in the FTSE 250 each month over the course of 30 years could generate a nest egg of £1m, assuming a total annualised return of 9%. While it may be possible to achieve that goal much faster with Bitcoin, there is a high chance of loss and disappointment too. As such, investors with a long-term outlook may wish to focus on mid-cap shares, rather than the cryptocurrency, due to their favourable risk/reward ratio.
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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.