So you have £5,000 to invest and are considering your options. Should you invest in high-flying cryptocurrencies or stable dividend stocks? Read on to find out.
Investing or gambling?
There’s no two ways around it – Bitcoin was the best-performing asset of the 2010s. If you had invested £100 in the cryptocurrency in 2010, you would have close to £9m today, a truly enormous amount of money. Does this mean that you should buy Bitcoin today, at its current market price of around $8,750 (£6,699)?
In my opinion, no. If you were part of the fortunate minority who happened to own Bitcoin back in 2010, then I congratulate you. However, just because an asset has performed well in the past does not mean that it will continue to do so in the future. If anything, the reverse is true, as trends tend to revert to historical means.
What’s more, I doubt that there were many people who held onto their Bitcoin holdings during the boom. The same people who lament not having bought it at $100, might very well have sold it at $200 and been happy with their 100% return.
Does this mean that the price of Bitcoin will definitely not jump by a similar amount in the future? Of course not. But the problem is that there is no fundamental factor anchoring the price of cryptocurrency – it is entirely speculative. For this reason, I believe that Bitcoin investing is not really investing at all; rather, it is gambling.
The better alternative
What makes stock market investing different? Unlike the price of assets like cryptocurrency, the price of stocks is ultimately tied to the amount of cash that the underlying business is capable of generating. By looking at a business’s financial statements and the associated metrics, an astute investor can come to a reasonable estimate of what that business should be worth, an exercise that cannot be replicated with Bitcoin.
This isn’t to say that there aren’t many stocks out there whose price is driven by speculation, rather than sound fundamental decision-making. Knowing which companies are undervalued and which ones are overvalued is really what investing is all about.
Take a company like energy provider SSE (LSE: SSE), which currently trades at a price-to-earnings ratio of 12 and has a dividend yield of 6% that outstrips the FTSE 100 average of 4.2% by a considerable amount. SSE currently trades at approximately 1,500p per share, and its prospects have been significantly buoyed up in the wake of the election, with the threat of nationalisation by a Labour government now firmly in the rear view mirror.
This type of income stock is a perfect addition to a Stocks and Shares ISA, as this type of account allows you to reinvest any dividends from your portfolio without having to pay tax. By steadily adding to your retirement pot with purchases like this, you will be well on your way to building a fund for your old age, in a much more reliable and steady way than gambling with cryptocurrencies.
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Stepan Lavrouk owns no stocks 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.