With the price of Bitcoin having risen by as much as 225% in 2019, many investors may be considering its purchase. But while further capital growth cannot be ruled out, the reality is that the virtual currency is a relatively risky option.
Therefore, it may be a better idea to focus on FTSE 100 dividend shares when looking to build a nest egg that allows you to overcome an inadequate State Pension.
Risks
Although Bitcoin has enjoyed a period of improving performance so far in 2019, that can quickly change. Evidence of this can be seen from 2018, when the price of the cryptocurrency declined by over 80% after reaching a record high of almost $20,000 in December 2017.
The challenge facing investors in Bitcoin is determining what it is really worth. The virtual currency lacks fundamentals, with its price level being decided solely by investor sentiment. So with the world economy potentially experiencing an uncertain period, this could lead to an increasingly risk-averse stance across the investment community that produces a more challenging period for the cryptocurrency.
Although the FTSE 100 would not be immune to a deterioration in investor sentiment, the index has always recovered from bear markets. Furthermore, a fall in share prices would mean that investors can purchase high-quality stocks at wider margins of safety. This could provide them with higher long-term returns, with company fundamentals allowing them to capitalise on lower market valuations.
Return potential
Although buying Bitcoin may seem to be a good idea when it comes to building a nest egg for retirement, the prospects for the virtual currency may be less appealing than many investors are expecting.
For example, Bitcoin’s limited size and lack of infrastructure may mean that it is unable to replace traditional currencies. Furthermore, regulatory concerns may mean that it does not become a mainstream method of payment. This could hurt its price level and lead to significant volatility.
By contrast, the FTSE 100 has a strong track record of delivering total returns that are in the high-single-digits on an annualised basis. In fact, it could produce relatively high returns in the long run, since it trades only slightly higher than it did in 1999, while its dividend yield of 4.25% is above its long-term average.
Investment potential
As such, buying a range of large-cap dividend shares could prove to be a shrewd move. They may not offer the same level of excitement as Bitcoin, in terms of their potential for rapid capital growth, but their risk/return ratio could be significantly more enticing.
At a time when generating a second income in retirement to overcome an inadequate State Pension is becoming more important, relying on the FTSE 100 and its solid track record of growth seems to be a more logical move than buying a virtual currency which, ultimately, may fail to replace traditional currencies.