Some investors have rushed to buy Bitcoin as stock markets around the world have plunged. Bitcoin investors believe that the crypto asset could provide a hedge against further market declines.
So far, this hasn’t happened. The cryptocurrency has declined in value since the coronavirus crisis started to ravage the global economy.
Unfortunately, it doesn’t look as if this is going to change anytime soon.
The price of Bitcoin is determined by supply and demand. This means that, in theory, the value of the crypto asset should increase if investors flock to Bitcoin in times of stress.
As that hasn’t happened, market trends suggest investors haven’t been rushing to buy Bitcoin in times of stress. The fact that the value of Bitcoin has fallen suggests they’ve been doing the opposite.
As such, investors with a long-term investment horizon might be better off buying the FTSE 250 right now.
Leading stock index
The FTSE 250 is an index made up of some of the largest companies in the UK. But this means that, unlike Bitcoin, the price of the index is backed up by cash flows.
Like Bitcoin, stock prices are also determined by supply and demand. However, over the long run, stock prices tend to move in line with the intrinsic value of a business. So if the fundamental value of a company increases, its share price generally does as well.
For the 35 years to the beginning of March, the FTSE 250 produced an average annualised return of around 12%. At this rate of return, an investment would double in value every six years.
While it is impossible to tell what is in store for the stock market over the next few weeks and months, it’s highly likely that in the long run, equities will move higher as the global economy grows.
The same cannot be said for Bitcoin. We have no idea what the Bitcoin price will do over the next few years.
Another advantage of owning the FTSE 250 over Bitcoin is income. The index offers investors a dividend yield of around 3% at present.
However, most platforms will charge you to own and store Bitcoin. That’s without including transaction costs. Some platforms demand several percent in fees to buy and sell the cryptocurrency.
Meanwhile, most online stockbrokers will let you trade a FTSE 250 tracker fund for free.
As well as a token income stream, an FTSE 250 tracker can be owned inside a Stock and Shares ISA. That means there’s no further tax to pay on income or capital gains booked when holding the asset. For higher-rate taxpayers, this can be a significant advantage.
The Bitcoin bottom line
Overall, not only does the FTSE 250 offer better long-term investment prospects than Bitcoin, but it also provides a passive income stream, which is tax-free if held inside a Stocks and Shares ISA.
The post Forget Bitcoin! I think the FTSE 250 is the better buy right now appeared first on The Motley Fool UK.
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