At first glance, it looks as if Bitcoin has been a sensible investment in 2020. The value of the cryptocurrency has increased by nearly 50% this year.
However, despite this performance, I’m not convinced Bitcoin is a sensible investment for the long term.
Today I’m going to explain why.
The drawbacks of Bitcoin
The most significant disadvantage of Bitcoin over other assets is its speculative nature. Because the cryptocurrency does not produce any cash flow itself, it is only worth as much as other investors are willing to pay for it.
This year, investors have been willing to pay more for the cryptocurrency. Some investors believe it is an excellent way to store wealth in uncertain times. Unfortunately, there’s no guarantee this will continue. Just because investors like Bitcoin today does not necessarily mean they will continue to like the asset for the next 10 years.
On the other hand, the stock market is a tried-and-tested way of building wealth in the long run. Over the past 120 years, UK stocks have produced an average annual return for investors of around 7%.
The best way to replicate this return could be to buy a low-cost FTSE All-Share tracker fund. Alternatively, a basket of blue-chip income stocks may do the same job.
Each stock represents part of a business. As such, the owner of each stock is entitled to a certain percentage of the company’s cash flow and assets. Cryptocurrency investors are not entitled to the same protections. Therefore, owning stocks comes with more protections and guarantees than unregulated cryptocurrency.
Long-term growth
I believe stocks will produce higher returns than Bitcoin in the long run. Over the past century, the stock market has grown in line with the global economy. There’s no reason why this trend can’t continue.
Over the next few decades, as the global economy continues to expand, the stock market should continue to rise in value as well, just as it has done over the past 120 years.
According to my calculations, an investment in the stock market of £50,000 could grow to be worth £1m in 43 years, that’s assuming an average annual rate of return of 7%.
I firmly believe that the stock market will produce higher returns than Bitcoin in the long run. However, if you think the cryptocurrency does have potential, nothing is stopping you from owning it in your portfolio. This year, the cryptocurrency has proven itself to be an excellent asset to hold in uncertain times, and this may be appealing for some investors.
If you do go down this path, I recommend allocating only a small percentage of your assets to Bitcoin.
If you invest 5% or 10% of your portfolio in the cryptocurrency, you could still benefit from any potential growth in its value.
Meanwhile, the limited allocation would reduce overall risk. There have been several high-profile cyberattacks in recent years on cryptocurrency owners. This may continue, and the best way to protect your wealth is through diversification. Diversification between Bitcoin and other stocks would provide the best of both worlds.