Is bitcoin a better buy than the FTSE 100?
The FTSE 100 has a mixed record of creating value for investors. Over the past two decades, the UK's leading index has struggled to break above 7,000, although it has smashed through this barrier in the past 12 months.
Part of the reason why the index has powered higher since 2016 is the falling value of sterling. In dollar terms, the FTSE 100 is actually 11% below its five-year high.
The performance of the index is at the mercy of many different global trends. Global economic performance, the strength of sterling, trade wars and political battles have impacted, and will continue to impact, the performance of this global trade barometer.
So, does this mean bitcoin is a better buy?
Is bitcoin a better buy?
If you're looking for a simple investment, bitcoin superficially stands out as a better buy than the FTSE 100.
As we have seen over the past two decades, the performance of the UK's leading blue-chip index is highly correlated to global economic trends. It took years for the FTSE 100 to recover from the dotcom boom in the late 90s and it has only just recovered from the financial crisis. What's more, recent performance has been driven more by Brexit (and depreciating sterling) than anything else.
On the other hand, bitcoin is easier to understand. The value of the cryptocurrency is built on its user base. The more users there are, the higher the value, and unlike the FTSE 100, its value is not dependent on global economic trends. Moreover, you can argue that as a decentralised asset, with no central bank in control of the currency and no risk of debasement through money printing, bitcoin is a safe haven asset that could help protect you against any future market meltdowns.
Some drawbacks
Yet while bitcoin does have some advantages over the FTSE 100, it also has some drawbacks. The biggest problem is the crypto asset's lack of cash flow. Much like gold, as an investment, the only way you can make money from bitcoin is if the price rises. Meanwhile, it may cost you money to store it safely. The FTSE 100, on the other hand, currently supports a dividend yield of 3.8% backed up by cash flows from global businesses.
I think this is the most significant differentiator between the two investments. Bitcoin might have similar qualities to a safe haven asset, but no one knows what the price of the cryptocurrency will do going forward. The same can be said for the FTSE 100, however, even if the index goes nowhere over the next 10 years, investors will still pocket a 3.8% dividend while they wait.
With this being the case, if I had to pick between the two, I believe the FTSE 100 is a better buy than bitcoin. However, this might not be the best outcome for everyone. Indeed, if you already have a substantial equity portfolio, and you're looking for some diversification, bitcoin could be an interesting alternative to gold.
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Rupert Hargreaves owns no share 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.
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