The last year has been an extraordinary one for Bitcoin. It has risen from $1,000 to as much as $19,000 before dropping back to its current price level of around $14,000. Therefore, investors who bought prior to the last month or so are likely to be sitting on significant levels of profit generated in a short space of time.
Investment strategy
Of course, many people who have bought Bitcoin have done so with a short-term timeframe in mind. They do not intend to hold the cryptocurrency for the long run since, in all likelihood, it’s probably not going to become a replacement for traditional currencies. For starters, it’s limited in terms of volume, while there’s a lack of infrastructure to send and receive payments. And with there being no way to reverse a Bitcoin transaction, its use as a day-to-day currency may be relatively unappealing for consumers.
As such, the appeal of the virtual currency seems to be in its potential for a quick buck. Clearly, this has not been the case over the last month, but in prior periods it has been a means for investors to generate high returns in a short space of time.
Long-run potential
While some investors may have generated a significant amount of profit from buying and selling Bitcoin, the reality is that doing so on a consistent basis over an extended time period may not be possible. The virtual currency’s price movements are incredibly difficult to predict, with them not being linked to any fundamentals. Literally, the price of the asset could spike $1,000 higher or lower within a matter of hours. As such, the potential for losses remains high, with the asset falling by around 30% in the last month alone.
In contrast, investing in other assets such as shares over a long-term period could be a more profitable move. Certainly, they may not offer the potential for the size and scale of profits in the short run as Bitcoin does, although some small-caps may deliver stunning capital growth. But in the long run, the impact of compounding could mean that a stock which delivers 7-8% in total returns per annum is able to beat the performance of the cryptocurrency.
Lighter risks
As well as the prospect of higher returns over a multi-year time period, shares also offer far less risks that Bitcoin. They are linked to the fundamentals of a business, which means it’s easier to estimate their performance. And with lower volatility as well as the potential to still offer growth many years down the line, they seem to have a superior risk/reward ratio than the virtual currency.
While Bitcoin may continue to make the headlines and some investors could get rich quick from trading the asset, taking a long term view on a diversified portfolio of shares seems to be a more profitable idea.