The 20%+ rise in the price of Bitcoin over the last couple of weeks could cause some investors to consider its purchase. After all, the virtual currency has delivered high returns over the last decade that have significantly outperformed mainstream assets.
However, the risks involved in holding Bitcoin continue to be high. Its lack of fundamentals and unclear long-term outlook could mean that buying income-producing FTSE 250 shares is a better idea. Since many of them trade on low valuations, they may deliver higher returns in the long run than the cryptocurrency.
As mentioned, Bitcoin lacks fundamentals. This essentially means that there is no data that can be used by investors to determine whether it offers good value for money at a specific price level. As such, buying it following a price drop does not mean that investors are necessarily buying the virtual currency while it offers good value for money.
Furthermore, the long-term prospects for the cryptocurrency are highly uncertain. Its limited size may be prohibitive in terms of being a replacement for traditional currencies, while the potential for regulatory change could mean that its future is highly uncertain. This makes Bitcoin a high-risk asset that may produce disappointing returns over the coming years.
With the FTSE 250 currently having a dividend yield of around 3%, it appears to offer sound income prospects. This could make it appealing to income-seeking investors, while improving its long-term total return potential. In fact, a large proportion of the index’s historical returns have been generated through the reinvestment of dividends. Due to the impact of compounding, they can have a surprisingly large impact on total returns.
Of course, it may be possible to build a portfolio of mid-cap shares that, when combined, offer a yield that is significantly higher than 3%. This could mean that investors are able to generate improving total returns in the long run at a time when Bitcoin does not offer an income opportunity.
The outlook for the FTSE 250 appears to be highly attractive. Many of its members currently trade on low valuations and this suggests they offer wide margins of safety. Alongside this, their growth prospects are upbeat in many cases as a result of the index relying on international economies that could grow at a fast pace for around 50% of its income.
Certainly, a challenging period for the UK economy may mean there is short-term volatility ahead. However, long-term investors may find that the possible risks from Brexit and the general election provide a buying opportunity while high-quality businesses trade on low valuations.
Therefore, despite its recent rise, now could be the right time to pivot from Bitcoin to FTSE 250 shares. The index’s high yield, growth potential and low valuations suggest that it offers a more favourable risk/reward opportunity for long-term investors.
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.
Motley Fool UK 2019