The FTSE 100 has experienced a market crash that’s sent its price level around 25% lower since the start of the year. But Bitcoin’s price is little-changed year-to-date. As such, many investors may be attracted to the virtual currency, and could pivot from FTSE 100 stocks to Bitcoin.
However, over the long run, this may not be a profitable move. The track record of the FTSE 100 shows it has a history of cyclicality. That may allow long-term investors to buy undervalued shares ahead of a recovery.
By contrast, Bitcoin’s valuation is much more difficult to assess. It could experience a disappointing performance should investor sentiment come under pressure in the coming years.
A strong track record
Buying FTSE 100 shares today may seem like a risky move. After all, they could move lower in the short run if news regarding coronavirus is relatively downbeat.
However, the index’s track record shows a recovery is very likely over the coming years. The world economy has experienced numerous recessions in its history that have prompted severe falls in the prices of large-cap shares. They’ve taken many months (even years in some cases) to recover. But the FTSE 100 has always produced new record highs after its bear markets.
Therefore, investors who buy a basket of FTSE 100 stocks at the present time are likely to experience strong total returns in the coming years. Their returns may not be linear and could include periods of sharp declines. But a buy-and-hold strategy has generally been a successful means of capitalising on the FTSE 100’s long-term growth potential.
An unknown entity
Bitcoin’s history is much shorter than the FTSE 100’s. It also lacks fundamentals that can be used to assess its appeal as an investment. For example, it’s relatively straightforward to determine that a wide range of FTSE 100 shares currently offer good value for money. That’s based on their valuations versus their historic levels.
However, Bitcoin’s price is determined simply by investor sentiment. Therefore, buyers are unable to ascertain whether there’s a margin of safety on offer on purchase. Factors, such as regulatory risks, Bitcoin’s limited size, and competition from other virtual currencies could weigh on investor sentiment. So the cryptocurrency could experience severe declines that may be difficult to recover from.
Therefore, buying FTSE 100 shares could be a better idea than purchasing Bitcoin at the present time. The index appears to offer lower risks and higher return potential than the virtual currency.
A large proportion of the index’s past total returns have been derived from the reinvestment of dividends. That means income shares could have even greater appeal for long-term investors. Income shares currently trading on exceptionally low valuations. And that means they could offer high total return potential over the coming years.
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Peter Stephens has no position in any of the shares 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.