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Bitcoin is smashing the FTSE 100, so were the crypto bulls right?

Bitcoin is an alternative investment to the FTSE 100, and it will do well when conventional investments tank, right? Well, I’ve heard all sorts of claimed reasons why Bitcoin can turn us all into millionaires. And to be fair, so far in 2020 it’s beaten shares hands down.

Since the start of the year, in response to the Covid-19 crisis, the FTSE 100 has lost a little over 25% of its value. At the same time, the price of Bitcoin is up. So were the cryptocurrency bulls right all along? We need to dig a bit deeper.

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Bitcoin winning?

While Bitcoin might have gained this year, we’re looking at a gain of only around 2%. Admittedly, that’s a lot better than the FTSE 100’s loss. But if it was any good as a safe alternative, I’d expect Bitcoin to have done a lot better. After all, even gold, which just sits there looking shiny, has put on 10% since the year started.

And Bitcoin’s performance, though it is slightly positive so far in 2020, is nowhere near as good as the hyperbolic claims we’ve been getting from the crypto-bulls.

Last time I wrote about Bitcoin, it had just broken back up above $10,000, and enthusiasts were touting that as the start of the next bull run. One of them even reckoned it was going to reach $100,000 by the end of 2021. And well, since then the price has fallen to a little over $7,000. It must be one of the shortest-lived bull runs I’ve seen in years. And it gets worse.

Not immune

Bitcoin’s 2020 ‘success’ preceded the Covid-19 crisis. And since the pandemic took hold, Bitcoin has fallen pretty much in line with the FTSE 100. It seems it might not be such a great alternative for when shares aren’t doing well after all.

I reckon the FTSE 100 is still a far better investment than cryptocurrency, even now. In fact, especially now. Let’s ask one simple question about Bitcoin and about the FTSE 100: What does it create that’s of any value?

For the FTSE 100, the answer is simple. The FTSE 100 is a collection of top companies that generate real new wealth, through providing products and services that generate actual profits in the form of cash. And that cash finds its way into shareholders’ pockets in the form of dividends.

The answer for Bitcoin is simple too. It creates nothing.

Valuation

Next question: how can we value it? For the FTSE 100, we can relate the value of shares to the profits the companies make and the dividends they pay. For Bitcoin, it’s just whatever someone might pay for it in the future, based on nothing rational at all. It might be $1m, or it might be 10 cents. I’m betting it’ll get closer to 10 cents.

The FTSE 100 is down right now, sure. But it will surely bounce back, and the dividends that have been suspended should be reinstated. In 10 years, the FTSE 100 will have generated 10 more years of profits and paid 10 more years of dividends. And Bitcoin will still have produced precisely nothing.

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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.