Bitcoin’s recent volatility highlights the risks involved in investing in the virtual currency. Its price changes are difficult to predict, while it lacks an income or diversification potential. As such, its risks appear to be high – especially with competing virtual currencies and regulatory risks potentially weighing on its long-term prospects.
By contrast, investing in a range of shares could be a better idea. Not only do they provide an opportunity to diversify, investors can gauge which companies offer the most favourable capital return prospects through assessing their fundamentals. This could increase your chances of generating a high return that ultimately improves your prospects of retiring early.
The stock market provides a huge amount of opportunity for any investor to build a portfolio that is tailored to their specific risk profile. For example, an investor who wishes to take a high amount of risk in return for larger potential rewards may wish to buy smaller companies in sectors that have historically been more volatile. By contrast, an investor who does not wish to experience a high degree of risk may stick to larger companies with stronger balance sheets and track records of impressive growth.
This is in contrast to Bitcoin, which is an inherently risky asset. Since its price level is determined by investor sentiment, it is difficult to accurately predict its future price level. This leads to a high degree of volatility that may make it unsuitable for some investors.
Long-term growth opportunity
The long-term growth potential of the stock market appears to be high. The track records of the FTSE 100 and FTSE 250, for example, show that they have been able to deliver high single-digit returns on an annualised basis over a sustained period of time. Although there will inevitably be periods of underperformance, investors who are able to adopt a long-term holding period are likely to be rewarded with similar returns to those achieved by the indexes in the past.
This could create greater confidence among investors to purchase stocks while they trade on low valuations. After all, the stock market has always recovered from the challenging periods it has experienced to deliver new record highs.
Bitcoin, meanwhile, has a long-term future that is highly opaque. A variety of other virtual currencies could become more prominent over the coming years. Furthermore, with regulatory risks being high and there being uncertainty regarding whether it can ever replace traditional currencies, the prospects for the cryptocurrency appear to be relatively risky.
A simple strategy
Therefore, adopting a simple investment strategy that seeks to benefit from the tailwind provided by the stock market could be a sound move. Its track record shows that a buy-and-hold strategy can lead to impressive total returns in the long run, while diversification can reduce risk. This could be a more effective and less stressful means of increasing your wealth in order to retire early when compared to buying Bitcoin.
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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.