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3 big differences between investing in Bitcoin and the FTSE 100

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Via Yahoo Finance

I know some people who are usually rational and sensible and invest in top FTSE 100 stocks, but who have also invested cash in Bitcoin. And whenever we see cryptocurrency being discussed, it’s usually in the same investment context as things like the FTSE 100.

But to my mind, the two don’t belong within a mile of each other, and here are three reasons why.

Cash

The FTSE 100 generates actual cash that finds its way into the pockets of shareholders. In fact, the UK’s top index is forecast to hand over a staggering £92.2bn in dividends in 2019. That’s a yield of around 4.7% on the value of the shares, and is a lot better than you’d expect from a bank savings account.

Where does it come from? It’s from actual profits made by actual companies, which do actual things. They dig stuff out of the ground and sell it, they manufacture things, they retail goods, they provide services…

Bitcoin? It generates nothing, it creates nothing, it has no underlying productive nature whatsoever. It only works on the ‘greater fool’ theory, in the hope that someone else will buy it at a higher price.

It’s a bit like gold, except that it’s not tangible. And gold has some actual real-world use too, in the jewellery, electronics and other industries.

Quantifiable

Because of the real cash generated by FTSE 100 companies, it’s possible to put a rational valuation on their shares. For example, we can compare a share price to the earnings generated per share. That gives us a price-to-earnings ratio, and it’s a common measure used by investors.

We can also compare a share price to the dividends it pays, and that gives us percentage dividend yields, which help us understand how much cash we’re going to get. There are many other measures too, and they all tie a share price to something tangible.

Bitcoin? Nope, there is no similar rational measure for the value of Bitcoin, as there is nothing productive about it to which we can compare the price. Nothing you will read about Bitcoin can meaningfully relate its price to the tangible value of anything that has a tangible value.

Charts

Looking at what passes for news in cryptocurrency circles this week, I came across the fascinating fact that the Bitcoin chart has exhibited a “golden crossover“, which is apparently a “bull cross of the 50-day and 200-day moving averages.”

That’s nothing new, and you read that kind of gibberish every day in the cryptocurrency world, and it always has one key characteristic — it doesn’t give you any idea what will happen next. Typically, the conclusion is something like “if X happens next, the price could go up, but Y could send it down.” Utterly useless.

But, you might say, you hear the same nonsense about FTSE 100 share price charts too, and that’s true. But here’s the big difference — you can, and should, ignore it. You simply don’t need any fortune-telling nonsense when considering shares, and the short-term share price chart should be ignored too. And you know why — because there are rational quantitative ways to get a handle on the value of a share.

But with Bitcoin there’s nothing else.

More reading

Views expressed 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 2019


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