I believe the Bitcoin price is a pretty poor investment. In my opinion, because the asset has no underlying cash flows, it’s impossible to value and, as a result, it’s impossible to tell whether you’re overpaying or underpaying for the cryptocurrency.
However, my view is just one of many. There are still thousands of Bitcoin investors and supporters out there continuing to believe the cryptocurrency could be worth many multiples of its current price.
Back to $19,000?
Some of these supporters believe the price of Bitcoin could ultimately exceed its all-time high of more than $19,800, printed at the end of 2017.
These supporters argue that the price of the crypto asset will be forced higher if governments continue to print money, and the value of that currency is eroded. Because only a limited number of Bitcoins can ever be produced, they argue, the asset cannot be controlled by governments.
The problem is, it’s impossible to tell what the future holds for the Bitcoin price. After years of trying, and tens of billions of dollars in spending, cryptocurrency is still not widely used as a method of exchange. And it doesn’t look as if this is going to change anytime soon.
That doesn’t mean the Bitcoin price can never return to $19,000. It just means it’s unlikely in the near term.
In my opinion, the best way to play this trade is to invest a small percentage of your portfolio in Bitcoin if you really think the cryptocurrency could change the world. Limiting your exposure to around 5% will allow you to profit from any upside, and it will also cap losses.
A better buy
I think it would be best to invest the rest of the portfolio in high-quality blue-chip stocks or funds. Investment trusts are another great option. These are companies themselves, so they have much more flexibility when it comes to dividend payments. Some of these trusts have been paying dividends for more than 50 years as they’re allowed to build reserves in the good times, to smooth over returns in the bad.
Low-cost passive tracker funds are another great alternative. These track the market, so their performance tends to be more volatile than defensive, income-seeking investment trusts. Still, they tend to charge significantly less as a percentage of assets in management fees, which can make a big difference over the long term.
An investment fund that charges 1% per annum would cost £863 more than a fund with an annual charge of just 0.5% over the space of 10 years on an initial investment of £10,000 with a yearly return of 7%.
Another advantage of passive tracker funds is you’re not exposed to the whims of one investment manager. These funds track the underlying index, and there’s no skill involved in picking stocks. Therefore, it’s unlikely you will get caught up in a Neil Woodford-type scandal.
If you are happy taking on a bit more risk, small-cap stocks could offer the potential for much higher returns than the broader market. Over the past 10 years, the FTSE 100 has produced an average annual return for investors in the region of 7%. By comparison, the Morningstar IT UK Smaller Companies index of small-cap focused investment trusts has returned 14.7% per annum.