The crashed FTSE 100 is currently hovering around 5,415. It’s down roughly 23% over the last five years. In contrast, someone buying Bitcoin in April 2015 will have had an approximate 2,275% return on their investment. With those figures in mind, it’s easy to see the attraction of Buying bitcoin and adding it to a portfolio.
However, the above FTSE 100 return figure assumes you bought the index at a higher price point. The Bitcoin figure assumes you bought at the bottom.
The rule of thumb for buying stocks is to buy low and sell high. And what better opportunity is there to buy low than when the FTSE 100 has crashed?
A FTSE 100 crash different from the others
Many frightened investors, all selling their shares at the same time, cause market crashes. But the reasons why this happens vary from crash to crash.
Wild speculation on overpriced companies caused the 1929 crash and the associated Great Depression. The market was overconfident and it righted itself severely.
The 2008 crash began in the housing market where speculation on high-risk mortgage-backed securities was rife. The common theme to both was speculation on prices way above the fundamental values of the assets beneath.
Investors were not getting value for money. And they eventually acted on that.
The 2020 crash is different. The government has stopped business activity in order to contain the coronavirus pandemic. The problem is initially one of company liquidity and survivability, not speculation. Businesses may fail to produce expected earnings, prompting investors to sell their shares.
But examine the FTSE 100 more closely. There are many cash-generative businesses with a high chance of recovery. And many of these businesses are selling at good prices. In some cases they’re even undervalued, making a recovery very profitable. The consumer staples sector, for example, is a good place to start looking.
Tempted still by buying Bitcoin?
But what about those tempting returns from buying Bitcoin too?
Bitcoin is known as ‘digital gold’ by many, and “probably rat-poison squared” by Warren Buffett. As it’s a virtual currency, its supply is controlled by an algorithm. The price of Bitcoin is highly volatile because it is determined by market price alone.
Unsurprisingly, Buffett’s description is not unfounded. Bitcoin itself, unlike a FTSE 100 company, does not produce anything. The sale of it depends solely on someone else wanting it more than you. Buffett likens buying Bitcoin to buying into a bubble, and predicts a bad ending.
Predictably, there have been liquidity problems with buying and selling Bitcoin. After all, Bitcoin’s only true value is being able to swap it for real money. In my view, that’s pure speculation. It’s not investing.
A share on the other hand, is a small piece of a company. Companies hold real tangible assets. Successful ones add value to their customers. It’s these companies that are sustaining us all through this current coronavirus crisis. And it’s these same companies that will allow us to recover.
It’s true that the FTSE 100 may drop again. Volatility is a definite risk for me as an investor so I certainly won’t be gambling with Bitcoin. However, the biggest risk for me is not being invested in the FTSE 100 as the economy recovers.
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.