After a mixed 2018, the Bitcoin price has put in a much more positive performance this year. It entered 2019 at around $3,500 and has since traded as high as $12,300. At the time of writing, the price has stabilised at around $10,000.
One of the reasons behind the stabilisation in recent months seems to be macroeconomic uncertainty. Investors have flocked to the cryptocurrency in an attempt to protect their funds from volatile stock and bond markets around the world. They’ve also been buying the gold price.
These actions suggest many investors now view Bitcoin as a safe haven. A safe port in stormy waters, if you will. But if you’re thinking of investing in the crypto asset, I think you should take a step back and look at the bigger picture first.
The bigger picture
Bitcoin has attracted plenty of media attention over the past few years. At the same time, billions of dollars have been invested in trying to develop infrastructure, so that the cryptocurrency and its peers can be used as a method of monetary exchange.
So far, these efforts haven’t yielded any substantial results. It’s still relatively difficult to place a transaction in Bitcoin. Fees are high, the transaction can take days to complete, and the price is volatile.
The fact that technicians haven’t been able to solve these problems is quite worrying and, I think, shows that this asset is not all it’s cracked up to be. As a result, if you are thinking of investing in Bitcoin, I highly recommend only putting a small percentage of your wealth into this one asset. I would invest the rest into stocks and shares.
A better investment
The one big difference between Bitcoin and shares and is the fact that stocks are a piece of a business and as a result, are entitled to a share of that company’s cash flow. This makes them much easier to value. Many stocks also support a dividend yield.
For example, the FTSE 100 currently supports an average dividend yield of 4.5%. All you need to do is buy a low-cost index tracker fund to be entitled to this income. Bitcoin doesn’t offer a dividend yield. Instead, you need to pay to be able to store it, and transaction fees can be as much as 5%. You can own a low-cost tracker fund for less than 0.1% per annum.
What’s more, because shares are back by cash flows, we can be sure that these assets will get generate steady returns over the long term. The price of Bitcoin, on the other hand, is determined by supply and demand. If there are no buyers, the price could fall rapidly.
Over the past 119 years, UK stocks have produced an average annual return for investors of around 5.4% after inflation. Bitcoin’s track record is nowhere near as attractive.
The bottom line
So, if you are thinking of investing in Bitcoin, it’s worth considering the risks and rewards of doing so, as well as the alternatives strategies you can use to invest your hard-earned cash.
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Rupert Hargreaves owns no 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.