Bitcoin’s surge over the last few years has made many investors consider its purchase. After all, it has outperformed major indices such as the FTSE 250, with investors who bought the virtual currency enjoying significant gains in some cases.
However, it continues to have a highly uncertain future that could make it unappealing from a risk/reward perspective. By contrast, the FTSE 250’s investment potential could now be high following its lacklustre performance over the last few years. As such, it could help you to build a £1m portfolio.
Risk
Despite its rising price, the future prospects for Bitcoin remain as uncertain as they always have been. Investors currently have no way of knowing if the virtual currency’s price level is attractive, since it has no fundamentals on which its value can be judged. This means that its price is dependent upon investor sentiment. As the cryptocurrency’s past performance testifies, this can quickly change without prior warning and, in some cases, without clear logic.
The FTSE 250’s performance is also dependent on investor sentiment. However, this usually affects its performance in the short run, rather than the long run. Over a period of many years, its fundamentals have a significant impact on its performance. This means that investors are able to access data on its potential valuation in order to ascertain what its fair price should be. In turn, this helps them to manage risk, since they can purchase stocks that appear to trade at discounts to their intrinsic values.
Return potential
Clearly, the performance of Bitcoin over recent years has easily surpassed that of the FTSE 250. However, the index has experienced a period of uncertainty due to the political and economic risks facing the UK. They may have caused investors to adopt an increasingly cautious attitude towards companies with large exposure to the domestic economy, which has produced only modest growth over the last few years.
Looking ahead, the FTSE 250 could offer high rewards. Its track record shows that it is capable of delivering high-single-digit annualised total returns, while its current valuation suggests that it may offer above-average returns over the medium term.
By contrast, Bitcoin’s return potential could be more limited than it has been in the past. Ultimately, it may fail to become the dominant virtual currency over the long run, with other cryptocurrencies having the potential to become mainstream alternatives to traditional currencies. Meanwhile, regulatory risks facing the wider virtual currency segment may mean that there are significant uncertainties ahead that cause investor sentiment to deteriorate.
Outlook
While Bitcoin has been a more profitable investment than FTSE 250 shares over the last few years, the risk/reward appeal of the mid-cap index seems to be higher than that of the virtual currency. It could deliver improving performance and help to boost your chances of generating a seven-figure portfolio.