Over the past 12 months, an interesting relationship has developed between the Bitcoin price and the price of gold. Bitcoin and gold have started to move in lockstep, suggesting the crypto asset now has a safe-haven appeal. With this being the case, it’s no surprise some Bitcoin supporters have started to label the asset ‘gold 2.0′.
If Bitcoin becomes the next gold, crypto supporters reckon its market capitalisation could eventually hit $7trn — the current size of the gold market. That’s compares to the coin’s current market-cap of around $150bn.
The same line of thinking has also lead to claims the Bitcoin price could eventually be worth $20,000 if it continues to behave similarly to gold prices.
It’s impossible to say whether or not this is an accurate forecast because it’s impossible to place a value on Bitcoin. Unlike businesses, which generate a stream of cash flows that are easy to value, crypto currencies are only worth as much as people are willing to pay for it.
With this in mind, I think if you do want to include Bitcoin in your portfolio, it should be limited to just 5% or 10%, giving you exposure to the cryptocurrency without taking on too much risk.
A better investment
A much better buy, in my opinion, is a low-cost index tracker fund. The great thing about this form of fund is that it tracks the index of your choice, such as the FTSE 100, with little or no effort on your part. What’s more, unlike Bitcoin, which is just one asset, a passive index fund gives you exposure to a broad basket of companies. So you don’t have to worry about the outlook for a single investment.
Take the FTSE 250, for example. Over the past 10 years, this index has produced an average annual return of around 10%, enough the double your money every 7.2 years. And you don’t have to do anything to achieve this return either. All you need to do is click, buy, sit and relax as the index fund tracks the performance of the underlying stocks.
With 250 different companies making up the index, you’re unlikely to suffer a substantial capital loss if two or three end up going to the wall.
A fund will also give you a steady income stream. Unlike Bitcoin, which doesn’t produce any income and usually costs money to store, most stocks offer a dividend yield. At the time of writing, the average dividend yield for the FTSE 100 is around 4.6% — an aggregation of all the dividends in the index.
Once again, the diversification here is a huge benefit. You don’t need to worry about the prospects for any one single company in the index because if one fails, another one will take its place.
That’s why I think stocks are a better buy than Bitcoin for investors who are looking for steady returns over the long term.