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Forget the Bitcoin price! I’d invest £5k to help me make a million like this

Rupert Hargreaves
New virtual money concept, Gold Bitcoins

Bitcoin became increasingly popular in 2019. The value of the cryptocurrency rose substantially during the year, although it has since retreated. 

As such, investors might be thinking of taking advantage of this recent price decline to add the currency to their portfolios. However, the Bitcoin price could fail to offer better returns than the stock market. Many FTSE 100 and FTSE 250 stocks have better growth prospects and income credentials.

Therefore, investing £5,000 in the stock market could be a better means of making a million. 

The Bitcoin price 

At the time of writing, Bitcoin’s price has fallen to around £5,000. This might look cheap compared to its trading history, but we’ve no way of knowing whether the current price represents good value for money. 

That’s because the Bitcoin price doesn’t trade on fundamentals. The price is entirely dependent on sentiment… it’s only worth as much as other investors are willing to pay. 

It’s much easier to ascertain the value of FTSE 100 and FTSE 250 stocks. Unlike Bitcoin, the constituents of these indexes produce tangible cash flows. We can use these figures to create an underling fundamental value for each stock. 

Therefore, it’s easy to figure out whether or not these assets offer value at current prices. Lower valuations can provide the opportunity to buy high-quality businesses at discount prices. Such a margin of safety can help investors achieve market-beating returns over the long term.

Focusing on companies that have solid balance sheets with favourable growth outlooks and robust cash flows is likely to produce better returns over the long term than speculating on an asset without any underlying fundamental value.

Making a million

As the Bitcoin price has languished over the past 12 months, FTSE 250 investors have seen the value of their portfolios rise substantially. The index gained nearly 29% in 2019, including dividends. 

According to my calculations, over the past two decades, the index has produced an average annual return for investors in the region of 11%. At this rate, it would be relatively straightforward to make a million with an initial investment of £5,000, and subsequent monthly contributions. 

An initial investment equivalent to the current Bitcoin price, coupled with monthly contributions of £300, would grow to be worth just under £1m after 30 years at an average annual rate of return of 11%. 

While 2020 could be a volatile year for the FTSE 250, the fact the index has produced such impressive returns over the past two decades should reassure investors that, over the long term, the stock market is an attractive place to invest your cash.

The bottom line 

Considering all of the above, now might be the time to focus your efforts on the stock market rather than Bitcoin. The cryptocurrency price might look attractive after recent declines but, from a long-term perspective, stocks and shares seem to offer a better risk/reward ratio.

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Rupert Hargreaves owns no share 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