It seems Bitcoin pundits are hellbent on proving the naysayers wrong. Despite a rollercoaster ride of almost violent swings in value, Bitcoin investors remain plugged in. It seems the reserve of young, adventure-minded fast-buck seekers with high risk tolerance.
For the more cautious and traditional stock investor, it presents a conundrum because it is beginning to look as though it should be an integral part of a financial portfolio, or at the very least a wary step into potentially useful territory. Or not. It’s a puzzle. So while many sit on the fence watching the show with their ‘I told you so’ comments at the ready, Bitcoin continues to bounce, bumble and leap its way to ever new highs.
So is adding cryptocurrency to your portfolio the right thing to do?
All investments carry risk – and weighing this risk is a crucial part of investment strategy. The more you analyse the market, the more canny your judgement may become. But the market also carries the potential to lose pace at any time, and for a host of reasons. So while there are those that claim investment in either sphere may carry the similar risk, the market does have certain assurance and advantage in the characteristics underpinning companies.
The argument for stocks
- Taking volatility into account, stocks have the stability of history and verifiable long-term track records.
- The value of stocks is based on profit, and therefore assure a more stable investment environment due to underlying supports.
- One can reasonably assume that companies will continue to exist in the future, and therefore provide ongoing stability.
- Shares mean part-ownership in a business. And business is backed by a company’s assets and cash flow to which your investment may give you legal claim – whereas cryptocurrency is not backed by anything at all.
- With stocks, you know what you are investing in. You are able to evaluate risks and returns, and what may drive success. Without this kind of information, engagement becomes a gamble.
- A stock price depends on the company’s ability to grow its profits over time. And success depends on authentic underlying factors. As a result, stocks tend to rise over the long-term.
- In truth, volatility can be high with stocks, and many stocks can rise 100 percent or more in a year, and may fall just as quickly, but they tend to be less volatile than crypto. Generally, the longer you can leave your money invested, the better.
- Taking all these aspects into account, a diversified collection of stocks invested on a long-term basis, should make up the majority of your portfolio.
- There’s no doubt that cryptocurrency investment has taken the world by storm. The ever popular Bitcoin is now worth in the region of one trillion dollars.
- However, as a newcomer, Bitcoin is still not widely adopted, and therefore could be replaced by more innovative and efficient digital currencies. On the other hand, should governments and banks get more involved, it could be regulated out of existence.
- But Bitcoin does provide alternatives, and could add extra diversity to your portfolio. But there is still a strong sense that it should never become the main focus of your strategy.
- Is it too late to invest in Bitcoin? Bitcoin may be pricing itself out of the market for the average investor. There may be a limit as to how much one might be prepared to pay for something that exists on an ever-shrinking shared scale. However, if you think it will gain ground in the future as a result of continued popularity, and considering the limits placed on production, it could be worth investigation as an addition to your asset spread.
- A danger is that Bitcoin does not undergo the same scrutiny that regulated securities markets like the stock exchange do.
- Always keep an eye on how Bitcoin compares to traditional investments such as stocks, which have a solid long-term track record.
- Because cryptocurrency is not backed by assets or cash flow, the only thing moving crypto prices is speculation driven by sentiment. In fact, you have to hope that someone will want to buy your investment in the future for more than you paid. And that’s all there is – hope that your investment will ultimately be worth more as time goes by.
- Keep in mind that China has banned cryptocurrencies in 2021, and other countries may follow suit.
- Volatility is still the bane of Bitcoin, so you need to consider your risk tolerance. Relying only on sentiment for value is somewhat scary. So gains and losses are always going to keep one anxious. Cryptocurrencies rising or falling 50 percent or more in a year is commonplace.
- The volatility is certainly not for the fainthearted. During 2021, Bitcoin lost more than half its value in a few months, but later gained it back. Therefore consider your crypto investment as long-term – and as something you can afford to lose.
All of these factors mentioned regarding Bitcoin and cryptocurrencies create a dangerous level of risk. Always thoroughly research before you invest, and analyse your own risk aversion before making decisions. And then decide whether Bitcoin or stocks are the better – or bigger – investment for your portfolio.
Foster Wealth: steering business, driving wealth
At Foster Wealth innovation, agility and in-depth market acumen are our daily fare. The volatility of markets, unexpected events and fluctuating values continually take us to new levels of interest and possibility. Constant re-assessment and evaluation are how we keep ahead of the curve – but our hard work, professionalism, attention to detail and personal attention are the hallmarks of our business and will never change.
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