The value of Bitcoin has increased significantly this year. Following this performance, some investors might be tempted to buy the cryptocurrency ahead of further potential gains. However, I think buying a basket of UK shares could be a better strategy in the long term.
Bitcoin might look attractive from a price perspective. But the asset has some significant drawbacks which reduce its appeal as a long-term investment in my view.
For a start, it isn’t easy to calculate how much each crypto coin is worth. As there is nothing underneath each Bitcoin, it is impossible to say if it is overvalued or undervalued to current levels.
In comparison, it is easier to place a value on UK shares because they generate profits. It is usually sensible to avoid stocks that look expensive compared to their earnings. Buying companies that look cheap compared to their earnings is a proven strategy of generating market-beating returns.
Another drawback of Bitcoin over UK shares is the lack of investor protection on offer. The Financial Conduct Authority regulates online stockbrokers. They have to hold a certain amount of capital on their balance sheets to avoid any solvency issues and compensate investors if things go wrong. Moreover, investments are also covered by the FSCS up to £50,000.
There’s no similar scheme for Bitcoin. If a crypto broker goes bust or acts in bad faith towards investors, there is not much investors can do to reclaim any lost funds.
Owning UK shares
Bitcoin has some significant drawbacks, which is why I think UK shares could be a better investment in the long run.
Almost anyone can invest in the stock market as long as they are over 18. You don’t even need that much money to get started. Most brokers will now allow you to set up a monthly investment plan from as little as £50 a month.
An investment of just £100 a week could be enough to build a sizeable financial nest egg. For example, over the past 35 years, the stock market has produced an average return for investors of approximately 8% per annum. According to my calculations, at this rate of return, a weekly amount of £100 spent on UK shares could grow to be worth £25,000 in two decades and £1.5m after 40 years. Considering its volatility, it seems unlikely Bitcoin has the potential to copy this performance.
I think the best way to achieve this sort of return is via high-quality blue-chip stocks.
In my view, Bitcoin does not even come close to providing the same sort of security and long-term growth potential.
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