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Bitcoin has smashed through $20,000. Is it the perfect Christmas buy?

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If you’d asked me this time last year where I thought the Bitcoin price would be today, I’d have got it wrong. I might have guessed around $4,000 or maybe $5,000 per coin. But Bitcoin has broken all records, smashing through $20,000 in December. So how wrong was I? In the short term, very. But in the long term, I remain convinced that Bitcoin will ultimately head downwards. Anyway, why did it climb so high in 2020?

It’s surely all down to the Covid-19 pandemic and a loss of confidence in governments, economics, and traditional financial systems. Bitcoin does seem to attract people more distrustful of the establishment.

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In 2020, investors moved huge amounts of money away from stocks and shares and into gold. It’s fallen from its peak, but gold is still up nearly 25% this year. I reckon the flight to Bitcoin has been similar, but with a key difference. Trading volumes have been smaller, and the freely traded number of Bitcoins has been more limited. That means it can easily be chased up higher, faster.

The best investment ever?

You might have guessed that I’m still not investing in Bitcoin. No, I’m sticking with shares in UK companies. And I reckon we’re still facing one of the best share-buying opportunities I’ve seen for years. Despite a late 2020 uptick, most UK shares are still on big drops this year. And it pains me to think of people selling shares and buying Bitcoin at $20,000 and more. Sell one thing when it’s really cheap, and buy something else at a record high price? That surely can’t be the recipe for long-term financial health.

UK shares have returned an average of 4.9% per year, above inflation. And that’s been for more than a century — actually, more like 120 years now. It’s not going to get me rich overnight, but I’m quite certain it’s my best route to a more comfortable retirement.

When I consider various forms of investment, I always keep one question at the back of my mind. Where does wealth actually come from? It comes from a combination of labour and capital, which together convert natural resources into useful things. The amount of cash in circulation represents the total value of all the goods and services being generated. And the more we produce, the more cash there is to go around.

Bitcoin tomorrow?

That combination of labour and capital is at its most effective in our companies. And we can all get a piece of the pie by buying shares in those companies. The money chasing gold upwards came from the wealth created by productive companies. It’s the same with Bitcoin too. The money tied up in Bitcoin ultimately came from the bottom-line profits of working companies.

Where will the Bitcoin price be this time next year? I have no idea. But I remain firmly convinced that, over the long term, it’s going to fade in comparison to stock market returns. Bitcoin is not for me. I want a piece of the only investment out there that generates actual new wealth.

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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.

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