The performance of Bitcoin’s price this year may have convinced some investors the cryptocurrency is worth buying. Indeed, since the beginning of 2020, the value of the crypto asset has increased by around a third. That’s compared to a double-digit loss for the FTSE 100 over the same period.
However, while Bitcoin has been a good investment in 2020, I think investors would be better off buying stocks for the long term.
Bitcoin vs equities
In my opinion, there are three main reasons why stocks and shares a better investment than Bitcoin.
First of all, the crypto asset has no underlying fundamental value. That means it’s difficult to figure out how much the currency is worth. Businesses, on the other hand, produce cash flow, which is easier to evaluate.
Second, cryptocurrencies can be difficult to buy and sell. What’s more, many of the brokers offering access to these products aren’t regulated. This could mean that if investors run into trouble buying or selling Bitcoin, they’re on their own.
Third, security has been an issue. Hundreds of millions of dollars of Bitcoin have been stolen over the past few years. As there are no protections in place for investors. More often than not, a security breach will leave an investor with nothing.
In my opinion, all of the above are reasons to avoid the cryptocurrency. By comparison, every stockbroker has to register with the Financial Conduct Authority in the UK. Investors are also protected up to a certain amount if the institution becomes insolvent.
Stocks and shares also have a longer track record of creating value for investors. For example, over the past 120 years, UK stocks have produced an average annual return of around 7%. It doesn’t seem unreasonable to say this trend could continue.
At this rate of return, I calculate it would be possible to turn an investment of £100,000 in £1m in 33 years. Due to the unpredictable nature of Bitcoin, I don’t think investors could achieve the same kind of return with the crypto asset.
Acquiring a diversified basket of blue-chip stocks could be the best way to achieve this return. Companies such as Reckitt Benckiser and AstraZeneca provide diversification with their global sales base. They also offer investors a regular dividend yield. That’s another positive quality stocks provide. Many public businesses pay a regular dividend to investors, but more often than not, Bitcoin owners have to pay to store their crypto coins.
So, that’s why I would own stocks and shares over Bitcoin to make a million. However, there’s no denying Bitcoin has been a good investment in 2020. So if you want to take advantage of this, I think limiting the holding to just 5% of a portfolio could be a sensible strategy. This would allow you to profit from any future upside while minimising downside potential.
Rupert Hargreaves owns no share 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.