We can be fairly confident that anyone who had the foresight (or luck) to buy a decent amount of Bitcoin when very few knew about it only to sell at the end of 2017 will be a millionaire. That’s great for them but it’s not so great, in my view, for the herd who are now ‘invested’ in a hope that history might repeat itself.
For me, stocks will always be a better option for those wanting to build wealth. Here are three reasons why.
Taking us for fools
The only way of making money from a cryptocurrency is if someone more bullish (or just more adept at frittering away their money) is willing to pay a greater price than what it cost you to acquire it. Experienced investors know this to be an example of the ‘greater fool’ theory.
While it’s true we also buy stocks in the hope they’ll appreciate in price over time, we know future demand will likely be based on a company’s ability to grow earnings. In other words, there’s some substance behind the increase in value. Knowledge of a company’s fundamentals also gives us information about when it might be time to sell our holding. With Bitcoin, you’ll always be guessing.
Stocks pay you
Another key difference between Bitcoin and stocks is that a huge number of the latter pay out a proportion of their profits to their owners in the form of dividends. Bitcoin doesn’t ‘do’ anything. Hence, anyone holding it to make money is wholly reliant on price appreciation for returns (see point above).
Since study after study has shown that reinvested dividends play a huge role in transforming someone’s wealth over the long term, thanks to the power of compound interest, I know which horse I’d back. The only drawback to investing for income is that dividends can be cut if a company runs into trouble. If this bothers you, don’t worry: there are ways around it.
Bitcoin is a trader’s dream
One of the biggest turn-offs about Bitcoin is the fact its price is just so volatile. From its peak in December 2017 to December 2018, for example, it fell a little over 80%. Six months later, it was roughly 250% higher.
This kind of rollercoaster ride might be a trader’s dream (assuming they call it right), but it’s not something Foolish investors should warm to. Indeed, this is one reason why the adoption of Bitcoin as a form of payment isn’t really happening. If you owned something that could quickly double or triple in value, would you actually spend it?
Sure, stocks go up and down — that’s all we can be 100% certain of. Unless you happen to be unlucky, or pick risky oil, mining or biotechnology stocks however, you’ll probably never experience the kind of volatility endured by Bitcoin believers.
Even if you do pick a dud or two, the fact that investing in the stock market allows you to spread your money across multiple companies, sectors and countries should prevent you from being wiped out completely.
Bitcoin could go to the moon but it could also end up worthless. My gut is screaming the latter. So long as you’re strapped in for the long term however, picking stocks will always be a safer way of building a seven-figure portfolio.
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Paul Summers 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.