With Bitcoin’s recent return to prominence, many investors may be questioning whether this is a good time to start buying the cryptocurrency. After all, the price of a single token recently broke $10,000 (£6,787) for the first time since September 2019, and currently trades for around $9,300 (£7,148). Fears over the coronavirus outbreak and continued monetary easing by central banks the world over have contributed to the renewed interest in Bitcoin.
Nonetheless, I don’t think that investors should rush to pour their hard-earned cash into as unpredictable an asset as this. Here are some reasons why I don’t believe investors should risk it (and what I think they should do instead).
Volatility is the tendency of asset prices to fluctuate. The more volatile an asset, the more its price will move. On its own, volatility is not necessarily a bad thing. After all, if stock prices didn’t exhibit volatile behaviours, it would be impossible to buy them at bargain prices. Moreover, high volatility is not a synonym for poor performance — on the contrary, shares are more volatile than bonds or cash, and yet historically have outperformed both by considerable margins.
However, volatility does become an issue when it comes to maintaining peace of mind. If you’re not comfortable with the idea of your retirement portfolio frequently declining by 20% over the course of a single day, then I would suggest you stay away from this asset. I know I certainly would not be comfortable with that proposition.
The main problem with Bitcoin is that it is impossible to set a price target for it that is based on anything other than pure guesswork, unlike shares. It doesn’t produce a cash stream, like a bond. It’s not backed by a physical asset, like stocks and shares. It lacks industrial usage, unlike a commodity. Could it be the future of money? Maybe. But it’s equally, if not more likely, that it won’t be. I wouldn’t take those odds.
Pursue a sensible investing strategy
The truth is that at this point in time, Bitcoin is an entirely speculative asset, the price of which depends on what the next person is willing to pay for it. This is why I believe that investors would be much better served by putting their retirement savings into a well diversified portfolio of quality stocks purchased at low valuations. Unlike Bitcoin, many stocks actually pay dividends, meaning that you can reinvest that money back into your retirement portfolio and take advantage of the power of compound interest. Even if a company does not pay a dividend, it can still benefit from compound growth by reinvesting its profits back into itself. Actually, it is precisely this fact that explains the historical outperformance of stocks relative to bonds and cash.
Here is an example of how compounding can magnify your returns when investing in a Stocks and Shares ISA. The historical average annual return of the the FTSE 100 over the last 30 years has been 6.4%. If you invest £5,000 every year for 40 years at that rate, your nest egg will compound to over £970,000 — just shy of a million! What’s more, the Stocks and Shares ISA tax wrapper allows you to reinvest your dividends and capital gains tax-free! Prudent investors would do well to bear this in mind when putting their capital to work. Bitcoin? No thanks!
Neither Stepan nor The Motley Fool UK have a 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.