2020 has been a crazy year for so many reasons. For traditional investors like myself, the moves in financial markets have been slightly puzzling at some stages of the year. One of these has been the movements in the Bitcoin price relative to other markets.
For example, during the stock market sell-off in March, I thought Bitcoin would appreciate in value as an alternative investment. This, in the same way that gold rallies during uncertainty. Bitcoin and gold don’t pay any interest or dividends, but you could buy it as a store of value. The opposite happened, in fact, and the Bitcoin price fell below $5,000.
Over the past couple of months, the FTSE 100 has recovered some of the losses from this year, but still sits down around 1,000 points from earlier this year. Conversely, the Bitcoin price has made new all-time highs, trading above $23,000 as I write. Clearly, there’s no particular correlation between Bitcoin and stocks. This makes it hard to compare the two at an absolute level.
Stocks vs Bitcoin risk appetite
I would classify myself as having a medium-to-high risk tolerance when it comes to investing. This means that I’m happy to hold FTSE 100 growth stocks that potentially are losing money at the moment, with the hope of future returns. It also means that I’m happy to buy a stock that is out of favour with investors, as a contrarian buy.
Ultimately, there’s still a huge divide between the acceptance of taking those kind of investing risks and the risk of buying Bitcoin. A FTSE 100 growth stock has a fundamental value (we call this the enterprise value). The business will own tangible assets, sell a tangible product, and generate tangible cash flow. To the best of my knowledge, nobody knows what the actual value of a Bitcoin is, or the price it should be. This makes it risky to invest in as you don’t know exactly what you’re getting for your money.
Another element of the risk scale is the volatility. FTSE 100 stocks have been volatile this year, unusually so. Yet this still doesn’t compare to the day swings on Bitcoin. For example, I looked at the Bitcoin price action over the past 24 hours. Overall, the price was up 17%, a large move. There were short periods when sharp sell-offs happened. During a half-hour period, the price dropped 4.4%. It then bounced back.
Investing time frame
The final reason I won’t be selling my stocks to buy Bitcoin right now is because of my time horizon when investing. Although occasionally I do buy and sell over a short time period, I’m invested with a time frame of several decades. I genuinely don’t know whether Bitcoin will still be around in decades to come.
I do accept that people (and I have friends among them) have made a huge amount of profit from Bitcoin price movements in 2020. I’m happy for them, and would even buy a small amount of it myself with some spare change. But as for the vast bulk of my investment funds, I’m sticking to what I know: stocks!
The post The Bitcoin price hits all-time highs! Should I sell stocks and buy it for 2021? appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020