The past year have given investors all kinds of emotions. It can definitely be termed a roller coaster journey. Irrespective of which asset class you’ve been invested in, you’ll have seen major volatility.
In an epic battle of the asset classes, I thought it interesting to compare a 12-month investment in Bitcoin versus the FTSE 100. When I refer to an investment in Bitcoin, I mean buying into it via a virtual coin or some other investment that tracks the price. For the FTSE 100 stock index, I assume an investment into a tracker fund that mimics the performance of the 100 constituents. Let’s begin.
Show me the money
Using April to April timelines, an investment in Bitcoin would have made you just under 30%. This is using a price of $5,198 last April, versus an approximate price of $6,739 now. For a FTSE 100 tracker, your current investment would be down just over 27%. This uses a former price of 7,451 points versus a present price around 5,415 points.
For traditional stock investors like myself, this initially leads to some head scratching. Have I been barking up the wrong tree in order to grow my wealth? Solely by looking at those 12-month returns, Bitcoin seems to offer by far the better option.
The first thing I always do after looking at the percentage profit/loss from the two different assets is see what different ratios tell me.
A really useful statistic I like is the drawdown risk. This measure the difference (in percentage terms) from the highest point to the lowest point over the time period. Needless to say, the higher this number (known as the drawdown) the more risky the asset is. This is because it can be said to have higher volatility.
From high to low, Bitcoin has a drawdown of over 60%. This compares to a FTSE 100 tracker of around 35%. Now we get a clearer picture. While Bitcoin did offer superior returns, it came at almost double the volatility of a stock investment.
So knowing the above, what should I do now? In my opinion, the answer stems from which asset offers me the best value currently. Using financial ratios and looking at company balance sheets, various FTSE 100 firms look below fair value. Examples of this include Lloyds Banking Group and J Sainsbury.
When I look at Bitcoin, I simply cannot assign a fair value to it. How much is a Bitcoin intrinsically worth? I think many investors would agree that Bitcoin doesn’t trade like a normal asset and often has random moves higher or lower.
Given the volatility and unpredictability of Bitcoin, it could soar 100% in the next year. But by the same token, it could also fall 100%. I much prefer an investment with lower volatility with steadier returns. The FTSE 100 index does just that. In fact – with the slump over the past few months due to the Covid-19 pandemic, a future bounce-back could generate higher than average profit from investing now.
Jonathan Smith owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.