In the last month, the FTSE 100 has enjoyed a period of stunning gains. It has risen by over 7% to trade within a couple of hundred points of its record high. Investor sentiment has improved dramatically after the volatile period experienced in the earlier part of 2018. As such, many investors now feel much more optimistic about the prospects for the UK’s main index.
However, in the same time period, bitcoin has gained around 36%. Given that it has outperformed the Footsie by five times, could it be a better means of making a million?
Risk/reward
While bitcoin may have risen in value in the last month, this does not paint the full picture of the virtual currency’s performance in recent months. Towards the end of last year, it traded close to $20,000 before falling by as much as 70%. Even after the last month’s gain, it’s still valued at just $9,000. As such, the volatility of the cryptocurrency is exceptionally high.
This means that while it could offer further gains over the medium term, the risk of loss is far higher than is the case for the FTSE 100. The UK’s main index includes a range of stocks operating in a number of different industries. While profit warnings can occur, they’re unlikely to have a major impact on the performance of the overall index. Therefore, risk is considerably lower when compared to buying a single stock.
In the case of bitcoin, its price movements seem to be impossible to predict in the short run. Investor sentiment can change without a rational reason and this can lead to major price movements in a short space of time. Therefore, for investors looking to invest a sizeable portion of their portfolio, it may simply be too risky to be considered as a viable investment.
Long-term issues
As well as being volatile in the short run, bitcoin also has an uncertain future. There are significant regulatory risks ahead, with various Central Banks and governments seemingly circling the virtual currency as they seek to maintain the integrity of financial market regulation. This could lead to the implementation of rules and regulations which change the virtual currency’s market. Change could lead to uncertainty and declining investor sentiment.
Furthermore, the adoption of bitcoin as a replacement for traditional currencies seems to be unlikely. It lacks the infrastructure and volume to compete with traditional currencies. Therefore, aside from being a source of speculation, its long-term appeal seems to be somewhat limited.
Takeaway
While bitcoin could go on to generate improving performance over the coming months, its risk/reward ratio seems to be unfavourable. It lacks long-term appeal and could be the subject of changing regulations over the medium term.
In contrast, the FTSE 100 continues to offer a 4% dividend yield, has a diverse range of companies and a solid track record of growth. Therefore, buying high-quality companies trading at a discount to their intrinsic values seems to be a better way to make a million than buying the virtual currency.