This time last year, I’d written off Bitcoin. It was falling back from a second bull run that hadn’t come anywhere near its historic highs. It was all over, bar a few more twitches on the way down, wasn’t it? No. The FTSE 100 would surely do better in the years ahead.
Well, maybe not in the (singular) year ahead. When the Covid-19 pandemic hit, the price of Bitcoin crashed below $5,000 at one point, way down from its all-time high of $19,783 in late 2017. Bitcoin bulls who were still predicting the thing would soon smash through $20,000 and on to $100,000 and beyond were wrong. Surely. Weren’t they?
Well, a remarkable reversal has happened. As I write, the Bitcoin price has soared to $17,908, less than $2,000 short of a new record. So, will I abandon shares and go for Bitcoin instead? No. And I’ll explain why.
When I invest in an asset, I want there to be something fundamental behind it. Kicking a car’s tyres before you buy it probably doesn’t help, but it can make you feel better. In a similar way, knowing I could go round to a Lloyds branch and kick it to check its bricks are solid helps remind me I own a share of something tangible. I know Lloyds might not be the best example to use, with its share price down 40% in 2020. But I’m sure you know what I mean.
Hands-on products
Similarly with something like Tesco. I go shopping there. I touch and buy the stuff it sells. And I eat the food. I know it’s something real, providing essential goods of a kind that will never go out of fashion. And if I buy shares in a housebuilder, well, they provide perhaps the ultimate in safe tangible products. You can’t say that about Bitcoin.
I invest mainly for dividends. And, to be confident in them over the long term, I want to know how the profit that pays them is generated. I need to understand the business I’m buying a part of, at least to some level. Without that, if I didn’t know where next year’s dividend cash was going to come from, I really wouldn’t want to invest.
And that shows the key weakness of Bitcoin — it has nothing tangible underpinning it. And so no rational reason why it should continue on up. Sure, it might go further but, ultimately, I’m still convinced I’d lose money if I tried buying it for the long term.
Bitcoin volatility
Some gamblers (I just can’t call them investors) are excited by big short-term Bitcoin spikes. But that volatility is surely partly down to low liquidity. There’s apparently a total of $300bn in Bitcoins circulating, which sounds a lot. But that’s a tiny fraction of the value of the world’s stock markets. It only takes a relatively small number of investors to shift it.
What makes all the Bitcoins worth $300bn anyway? Only the price itself. And shares are worth more than just their price. They’re worth the value of their future streams of profits, and that’s something tangible. So no. Wherever Bitcoin might go in the short term, I’m sticking with FTSE 100 shares for long-term gains.