Bitcoin markets seem to be in a bit of a panic at the moment as the value of the electronic currency has been sliding, having fallen to $6,657 per coin as I write.
According to one commentator, it apparently “risks dropping to seven-month lows below $6,500, having found acceptance under a key long-term price support.”
Stock market followers can also bang on about price charts, and that leaves me thinking about the similarities and differences between cryptocurrency and FTSE 100 shares.
They both have charts, and investors pore over them. They’re very important too, as without them it would be hard to see just how well UK shares have performed over the past century and more (they’ve beaten other forms of investment hands down, by the way).
We also wouldn’t be able to see how much people who bought Bitcoin in the early days might have made, but also what stunning losses those who bought around that $19,891 all-time high have suffered.
One thing you can’t tell from a chart is where a price is going to go in the future — but that’s all Bitcoin followers have, with their talk of “buy walls,” of “200-period MAs,” of “three-day candles” and all the rest of that nonsense.
Kick the tyres
FTSE 100 shares represent actual companies providing tangible products and services. You can buy the things that companies make, and go round and knock on their door to check they’re real.
That’s part of what I think is the most important difference, which is that FTSE 100 companies generate actual new wealth. Bitcoin, like any classic form of gambling, is a zero-sum game, which means that all profits you might make are balanced by other people’s losses. Bitcoin (like gold, incidentally) doesn’t create anything, it’s just valued at whatever the next person will pay you for it.
Buy shares instead, hold them for the long term and take the dividends generated by the wealth creation process, and everyone can win.
Saying that, there are times when there’s great similarity between Bitcoin and shares, with one good example being the dotcom bubble at the turn of the century. Investors were piling in to any internet-related stock (just like any cryptocurrency), purely because they were going up and without any consideration of rational valuation.
It happens on a smaller scale all the time with hot new get-rich-quick growth stocks, when soaring share prices can lose all connection to fundamentals. But at least with shares, there’s an underlying reality to fall back on and there’s a rational valuation beneath it all. There are no rational valuation metrics underpinning the Bitcoin price.
Both face uncertainty too, though the scales are widely different. What will Bitcoin be worth in 10 years? We have nothing to guide us, and in recent months I’ve seen predictions ranging all the way from zero to $100,000. My own guess is closer to the zero end.
Shares? Can’t be sure, but we have a century’s worth of data indicating a long-term average annual gain from UK shares of around 4.9% above inflation. And we can see the real-world wealth creation process that supports it.
Gamble on Bitcoin if you like, but I sincerely hope you’ll put the bulk of your investments in UK shares.
Views expressed 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.