Why I wouldn’t bother with Bitcoin after the FTSE 100’s recent stock market crash

While the FTSE 100 has experienced a difficult 2018, it pales in comparison to the year that Bitcoin has had. It has dropped by over 80%, which is a far worse performance than the FTSE 100’s decline of 11%.

Although there could be scope for a recovery in the virtual currency’s price level, it is difficult to see from where the catalyst will emerge. It lacks real-world appeal, is clearly more correlated to the wider economy than many investors had realised, and lacks fundamentals in order to determine whether it offers good value for money. In contrast, the FTSE 100…

While the FTSE 100 has experienced a difficult 2018, it pales in comparison to the year that Bitcoin has had. It has dropped by over 80%, which is a far worse performance than the FTSE 100’s decline of 11%.

Although there could be scope for a recovery in the virtual currency’s price level, it is difficult to see from where the catalyst will emerge. It lacks real-world appeal, is clearly more correlated to the wider economy than many investors had realised, and lacks fundamentals in order to determine whether it offers good value for money. In contrast, the FTSE 100 could be a bargain at the present time.

International appeal

One reason why the FTSE 100 has appeal for a UK investor is its international exposure. More than two-thirds of its profit is generated outside of the UK, and this means that it offers a significant amount of diversity. Given the risks posed by Brexit in terms of its impact on the UK economy, international exposure could prove to be a worthwhile ally over the course of 2019 and in the coming years. Although Brexit could even prove to be a good thing for the economy, it may cause some disruption which is felt to a lesser extent by some of the FTSE 100’s incumbents.

Alongside diversity, its international exposure also offers scope to benefit from weakness in the UK economic outlook. The pound has weakened significantly since the EU referendum, and further uncertainty regarding whether there will be a Brexit deal could lead to investors becoming increasingly uncertain about the country’s financial outlook. The result may be weaker sterling, in which case, FTSE 100 companies that report in pounds and operate abroad may gain from a positive currency adjustment.

Risks

While the FTSE 100 can be volatile at times, history shows that it offers long-term growth potential. It may fail to make higher highs for a number of years, but its high single-digit total returns are relatively likely to continue after nearly 35 years of existence.

In contrast, Bitcoin is a relatively new idea. It has no track record of performance during a financial crisis, and this could mean that if global stock markets remain under pressure then the cryptocurrency’s value will fall at an even faster rate. That’s due to its price level being largely focused on supply and demand. If investors are wary about taking risks, it could mean that demand plummets yet further and causes a continued drop in the Bitcoin price.

Therefore, while the FTSE 100 may not offer the same scale of potential rewards as Bitcoin, it could deliver superior risk-adjusted returns in the long run. After a difficult year for both assets, the UK’s large-cap index seems to offer the more realistic option in my opinion, with the virtual currency being more akin to speculation than investment.

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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.

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