The FTSE 100’s decline since the start of the year could cause some investors to focus their capital on other assets, such as Bitcoin. The virtual currency has outperformed the FTSE 100 index over recent months. This trend could also continue over the short run.
However, on a risk/reward basis, the FTSE 100 could offer a superior long-term outlook than the virtual currency. As such, now could be the right time to capitalise on low valuations across the index and build a strong portfolio that delivers high returns in the coming years.
Improving investor sentiment could lead to a continued increase in the price of Bitcoin in the short run. However, holders of the virtual currency face a number of risks that could lead to disappointment further down the line.
For example, the current price of Bitcoin is based on investor sentiment. There’s no data available to suggest what the cryptocurrency is worth. Therefore, investors may be buying it at an attractive price, or at a price that grossly overvalues the virtual currency.
Its potential to replace traditional currencies seems low. This is due to its limited size, so investors may face disappointing returns over the long run. Alongside this, competition from other virtual currencies and regulatory concerns mean the risks facing Bitcoin holders are relatively high. This could make the virtual currency less appealing than it appears at first glance.
FTSE 100 potential
The FTSE 100 may have underperformed Bitcoin in recent months, but its long-term investment potential seems to be high. A strategy of buying large-cap shares while they trade on low valuations has been a highly successful means of generating strong returns in the past.
Economic risks present in the short run that could hurt the profitability of a range of FTSE 100 stocks. But over the long run, the past performance of the index suggests they’re very likely to recover.
Through focusing on data, investors can gauge whether a specific stock offers good value for money. For example, they can consider the value of its assets and its profitability, as well as its balance sheet strength.
This data can be used to paint a picture of the risk/reward opportunity that a specific stock offers, which isn’t available to Bitcoin buyers. This could reduce the risks of investing in FTSE 100 companies, as well as provide stronger returns in the long run.
The FTSE 100’s past recoveries from numerous bear markets means there’s a very high chance it’ll go on to produce new record highs in the coming years. Since Bitcoin has a much shorter track record, and its price isn’t linked to data such as rising profitability caused by economic growth, it’s a far riskier option for investors.
Therefore, with valuations across the FTSE 100 low and the index offering rebound potential, now could be the right time to build a diverse portfolio of large-cap shares.
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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.