In less than four months, the price of Bitcoin has fallen by over a third. This highlights the volatility of the virtual currency, as well as the risks involved in purchasing it.
Although the FTSE 100 may have experienced a turbulent period of late, its long-term growth potential remains high. Furthermore, its valuation suggests there could be improving prospects ahead for the index.
As such, now could be the right time to focus on large-cap growth shares as opposed to Bitcoin. They could offer a superior risk/reward opportunity and increase your chances of retiring early.
One of the main challenges facing investors in Bitcoin is not knowing what the cryptocurrency is worth. Since it has no fundamentals, a drop in its price of 33% does not necessarily mean that it suddenly offers good value for money. It could still be overpriced, or massively undervalued. Investors have no way of knowing whether a fall in its price represents a buying opportunity or the right time to sell up.
By contrast, the FTSE 100’s recent pullback could make it a more appealing investment opportunity. Its track record shows that buying following price falls can lead to investors benefitting from an improved risk/reward ratio, since the valuations of the index’s members are lower and therefore more attractive.
The FTSE 100 offers strong growth potential as a result of its exposure to fast-growing economies such as India and China. With a large proportion of the world’s economic growth taking place in emerging markets, the FTSE 100 could gain ground over the coming years as a result of over two-thirds of its members’ revenue being generated in international economies. This also provides a large amount of geographical diversity that helps to reduce risk.
Bitcoin’s growth potential is difficult to quantify. Its status as an asset with low correlation to the wider economic outlook appears to be flawed, judging by the fact that it is highly dependent on investor sentiment. Should there be a global recession, investors may become increasingly risk-averse and seek to sell their positions in volatile, risky assets such as Bitcoin. Furthermore, with the virtual currency having a limited size, its potential to replace traditional currencies may be exaggerated and ultimately lead to disappointment for investors.
Relying on the FTSE 100 to boost your retirement prospects could be a better idea than buying Bitcoin. The index offers a strong track record of growth, as well as international diversity. This means that it has a favourable risk/reward ratio – especially following its recent pullback. A price fall allows investors to buy high-quality businesses while they trade at lower prices.
The recent fall in the price of Bitcoin could continue if investor sentiment remains weak. As such, avoiding what is a relatively risky asset could be a sound idea when it comes to investing for your retirement.
Peter Stephens 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 2019