The surge in the price of Bitcoin over recent months may make it seem more attractive to many investors. After all, the stock market’s returns have been significantly lower than the virtual currency’s 100%+ rise since the start of the year.
However, investing in Bitcoin could go against a crucial part of Warren Buffett’s investment strategy. Namely, he only invests in what he fully understands. Certainly, some investors understand the risks involved in buying Bitcoin. But others do not. Therefore, it may be an investment to avoid, with the stock market potentially offering a more favourable risk/reward opportunity.
Since Bitcoin lacks fundamentals, it is not possible to ascertain at what price it offers good value for money. Its price is dependent on investor sentiment, which can change rapidly and without clear reason. Furthermore, its future prospects are extremely difficult to accurately predict. It could, for example, become more heavily regulated, while its limited size may mean that investor interest in it wanes as it may not be able to replace traditional currencies.
In addition, the rise of other virtual currencies may mean that investors become increasingly focused on other opportunities. This could hurt Bitcoin’s price level, and may lead to further volatility in its price.
Stock market potential
Even understanding Bitcoin’s potential risks does not mean that it becomes an attractive place to invest. It is a relatively young asset, and its history suggests that it can be highly volatile.
This contrasts with the stock market, which has a long track record of offering high-single-digit growth per annum. Although it may also be volatile from year-to-year, over the long run it is likely to deliver similar levels of returns to those achieved in the past.
In addition, investors can thoroughly research companies to find the ones that fit with their risk tolerance and investment strategy. For example, annual reports contain vast amounts of information on a business that allow investors to gain an understanding of what a company does, how it is managed and what its plans for future growth may be. This may help to reduce overall risk within a portfolio, as well as improve return potential.
Although the stock market has experienced a period of uncertainty in recent years, now could be a good time to invest. Many FTSE 350 shares appear to offer good value for money at the present time, which may lead to higher returns in the long run.
With the FTSE 100 having recorded an annualised total return of around 9% since inception, it offers long-term growth potential which could improve your financial future. It also offers the information required to make an informed decision regarding which companies to buy and sell. Since Warren Buffett has enjoyed significant success in his career and he only invests in what he understands, investors may be better off doing likewise and buying shares rather than Bitcoin.
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 2019