The recent stock market crash may have pushed some investors to own alternative assets such as Bitcoin rather than FTSE 250 stocks. However, despite the short term appeal of assets like Bitcoin, their long term prospects are far from certain.
Indeed, due to the way Bitcoin is structured, it is almost impossible to predict how much the cryptocurrency is really worth.
Bitcoin vs the FTSE 250
The price of Bitcoin is determined by supply and demand. If there are more buyers than sellers in the market, the price will go up. If there are more sellers than buyers, the price will fall.
The same is true for FTSE 250 stocks, to some extent, although there is one key difference. Their underlying businesses underpin the value of FTSE 250 shares. These firms have a fundamental value, which is relatively straightforward to calculate. It is impossible to do the same for Bitcoin.
For example, as FTSE 250 firms earn income from their operations. It’s quite straightforward to place a multiple on this income to arrive at an estimate of intrinsic value for the company. Bitcoin does not produce any income. Therefore, we can’t value the crypto-asset based on its profitability.
Long term prospects
The long term prospects for FTSE 250 stocks are also more attractive than cryptocurrency.
Cryptocurrency has been around for quite a few years, but as of yet, it is not widely used as a currency. Regulatory demands and illegal activity have hamstrung its adoption. What’s more, there’s no guarantee it will ever replace traditional money. Regulators could even decide to ban it if it becomes the go-to currency for criminals.
On the other hand, stocks and shares have been around for hundreds of years. They are a tried and tested way of creating and building wealth. The FTSE 250 has only been in existence for three-and-a-half decades, but during this time it has produced an average annual return for investors of 12%.
At this rate of return, it would take six years to double your money. An investment of £100,000 would grow to be worth £1m within 20 years.
While it is impossible to tell what the future holds for stocks, there is a high chance investors will continue to see similar returns going forward. Company earnings should grow in line with inflation over the long term. This should help support share price growth of around 3% per annum.
Including dividends paid to investors, as well as any other form of shareholder return and technological advantages, which may lead to improved profit margins, it is not unrealistic to suggest that company earnings could grow in the 5% to 10% range for the foreseeable future.
That’s why FTSE 250 stocks are likely to be a better investment than Bitcoin over the long term. As such, buying a basket of these companies could help you grow your financial nest substantially in the years ahead.
The post Forget Bitcoin! I’d buy cheap FTSE 250 shares to make a million appeared first on The Motley Fool UK.
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Rupert Hargreaves 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