The Bitcoin price has been on a wild ride this year. It entered 2019 at a price of around, $4,000 before rising to a high of nearly $13,000 at the end of June. Since then, the price has collapsed, falling as low as $7,500 before staging a small rally to $9,100 where it sits at the moment.
Despite this volatility, some die-hard Bitcoin supporters still believe the cryptocurrency is a better investment than stocks and shares over the long term.
They believe that, as a decentralised currency with millions of owners around the world, the crypto asset has a better long-term outlook because central banks or governments can’t manipulate it. What’s more, only a limited amount of Bitcoins can ever be produced, which implies its value is much less likely to be eroded by inflation over the long term.
However, Bitcoin has a lot of drawbacks as well. As noted above, the price of the crypto asset is exceptionally volatile. As a result, you can’t really use it on a day-to-day basis. Imagine leaving home with £20 only to find that when you get to the shop, it’s worth £10.
At the same time, transaction costs are quite high, and criminals have targeted owners repeatedly in the past, stealing hundreds of millions of dollars worth of the cryptocurrency.
In my opinion, all of these risks give stocks and shares an advantage over Bitcoin. Yes, the value of stocks and shares can move suddenly, but it’s also easy to buy and sell securities in seconds for just a few pounds.
Cryptocurrency transactions can take days. Also, stocks and shares are regulated, and companies dealing in the market have to conform to strict rules on security and ownership rights. The same isn’t true for crypto exchanges.
Another thing to consider is the fact that stocks are a piece of a business and you are therefore entitled to a percentage of its underlying company’s cash flows. This helps value the asset. By comparison, Bitcoin is only worth as much as other investors are willing to pay for it. That can mean either $20,000 a piece or $1,000.
In theory, as the global economy grows, the earnings of companies represented by stocks traded on the market should also grow, and that should push the stock prices higher. There’s no guarantee the same will happen with Bitcoin.
The better buy
Over the past 100 years, the value of UK equities has risen at a rate of around 5.5% per annum, after inflation. It’s challenging to argue with this sort of evidence. Bitcoin has been around nowhere near as long, so we have nowhere near as much information on its long-term potential.
So that’s why I would own stocks and shares over Bitcoin. And I believe the best way to invest in the market to use a low-cost passive index tracker fund. This will give you an instantly-diversified portfolio at the click of a button. Managers then take care of running the portfolio for you.
The FTSE 100 and FTSE 250 are both great indexes to track as they’ll give you exposure to some of the biggest and most profitable companies in the world, and help you earn those 5.5% per annum returns.
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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.