The soaring Bitcoin price may have caught the eye of investors who’d normally buy FTSE 100 shares. They may determine that the virtual currency offers exceptional return prospects due to its increasing popularity.
However, the cryptocurrency also has a number of risks that could lead to high volatility, or even disappointing performance.
Furthermore, many UK shares continue to trade at low prices despite the recent stock market recovery. As such, they may offer a more attractive risk/reward opportunity than Bitcoin on a long-term basis.
Risk/reward potential of FTSE 100 shares
The past performance of FTSE 100 shares shows they’ve delivered impressive returns for investors. For example, since the index was established in 1984, it’s produced annualised total returns of around 9%. Certainly, those returns have been volatile in that time. However, a long-term investor has generally been handsomely rewarded for simply buying and holding a diverse range of large-cap stocks.
Furthermore, the index has a solid track record of producing a stock market recovery following bear markets. Indeed, it bounced back from the 1987 crash, the dot com bubble and the global financial crisis to rise to new record highs. Since it currently trades over 10% below its all-time high, there seems to be a substantial amount of capital growth on offer as the world economy recovers in the coming years.
In fact, many FTSE 100 shares currently trade at extremely low price levels compared to their long-term historic averages. Sectors such as financial services, resources and consumer goods are relatively unpopular among investors. This suggests that they could be major beneficiaries of an improving economic outlook, which itself may catalyse the current stock market recovery.
The risks and rewards of Bitcoin
It’s understandable for the rising Bitcoin price to tempt investors in FTSE 100 shares. After all, the virtual currency is delivering extremely strong growth, with it having soared in recent months. Its strong momentum could mean that further gains are ahead in the short run. It could even outperform large-cap shares in the coming months.
The problem for investors though, is that Bitcoin’s impossible to value. Unlike listed companies, there are no facts and figures available through which to determine its appeal as an investment. Rather, the virtual currency’s price is based solely on investor sentiment. As its past performance has shown, this can change without any clear reason. Factors such as regulatory changes could mean that the cryptocurrency is susceptible to major declines over a short time period.
As such, its risks are likely to be much higher than FTSE 100 shares. Therefore, investing in high-quality companies at low prices could be a more attractive proposition on a risk/reward basis. Over the long run, UK shares could certainly offer high returns and far lower risks than Bitcoin.
The post Forget the Bitcoin price! I’d invest in FTSE 100 shares in this stock market recovery appeared first on The Motley Fool UK.
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Motley Fool UK 2021