Back in 2018, the price of one Bitcoin almost reached $20,000 before plummeting back down below $4,000 in a matter of months. Since the crash, its price has been steadily increasing, once again nearing $20,000. But is Bitcoin a good investment?
While I am sure many will disagree, I think Bitcoin is a poor choice to grow capital and here’s why.
Bitcoin can ultimately be used in two ways, either as a unit-of-account like the British pound or as a store-of-value like gold. In both cases, I believe Bitcoin falls short.
The problem with Bitcoin as an investment
For any currency or commodity to be a useful store of value, the price needs to be stable. And looking at the historical price of Bitcoin over the past five years, stability is nowhere to be found.
The stock market is certainly not free from volatility. But compared to Bitcoin’s price, which has risen and fallen by several thousand pounds in mere weeks, the market volatility seems to fade away.
The large fluctuations in Bitcoin’s price make the asset unfit to fulfil the roles of a traditional currency or serve as a store of value. However, Bitcoin does have a few compelling advantages.
There’s a limited number of coins available in the world with no additional coins being created. This means that the global supply is fixed, making the cryptocurrency immune to inflation. It’s also incredibly easy to send large sums of money across borders anonymously – although this tends to be an advantage for criminals.
Bitcoin vs the stock market vs cash
Cryptocurrencies may become a preferred method of transferring funds or protecting wealth in the future. But it’s not there yet. Thus, the underlying value of Bitcoin is currently entirely driven by speculation.
For this reason, Warren Buffett has often dismissed Bitcoin and has shown his preference for shares.
But even in a world where its price stabilises, it ultimately becomes just another currency or commodity, both of which have consistently underperformed versus the stock market.
Since its inception in 1984, the FTSE 100 has yielded an average return of 7.75% per year. Gold, on the other hand, while certainly going through periods of sudden growth, has only averaged a 5% annual return. And holding your assets as cash would have resulted in a loss of value due to inflation.
A 2.75% difference may seem like a small margin, but over the long run, it has a massive impact. Let me demonstrate.
An investment of £1,000 is made in both gold and a FTSE 100 tracker fund in 1984. Today, based on each asset’s average annual returns, the investment in gold is worth £5,792. Not bad, but the investment in the FTSE 100 tracker fund is worth £14,690 – almost three times as much!
The bottom line
When buying shares, you are purchasing a piece of a company. Share prices can be volatile over the space of a few months, but over several years, they always eventually reflect the value of the underlying business. When you buy Bitcoin, you are buying an asset which does not create anything, and so the price is completely dependent on what the next person is willing to pay for it.
Because of this I firmly believe that buying shares in fantastic businesses and holding them over the long term remains the most effective method for building wealth.
The post Thinking of buying Bitcoin? I’d follow Warren Buffett’s example and buy shares instead appeared first on The Motley Fool UK.
Zaven Boyrazian has no positions in any of the assets 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