Even though Bitcoin is now trading at around 20% of the record high it achieved in December 2017, some investors will still be significantly in profit. The virtual currency, of course, started 2017 at $1,000, and had traded at much lower prices than that in previous years. As such, only investors who purchased the cryptocurrency in the last 18 months are likely to be making a loss on their investment.
However, this does not consider the risks associated with investing in Bitcoin. It is a relatively new concept, and there are doubts surrounding whether it will be able to deliver on its potential in terms of real-world usage. As a result, from a risk/reward perspective, investing in stocks could be a significantly better means of retiring early.
One of the main risks involving Bitcoin is its lack of real-world value. There are doubts as to whether it can ever replace traditional currencies, since it appears to lack the size and scale required. Similarly, its infrastructure seems to be insufficient to gain in popularity among consumers. Furthermore, regulators have been negative about its potential use in many cases, which poses a significant risk to its long-term viability.
Meanwhile, its status as an asset which offers diversification potential now seems to be fading. It appears to be more reliant on investor sentiment than many other assets. And with sentiment likely to change rapidly and significantly, the volatility of the Bitcoin price can be exceptional.
Given the above risks, even stunning returns from holding Bitcoin may be insufficient to make it a worthwhile investment over the long run. In other words, the potential for loss seems to be exceptionally high, which means that investors need to be adequately compensated for the risk they are taking.
In contrast, it is possible to build a portfolio of stocks which matches an investor’s risk appetite. This provides a significant amount of flexibility when it comes to obtaining a desired risk/reward ratio, and could help to more easily align an investor’s portfolio with their financial goals.
This is particularly relevant when it comes to retirement planning. An investor may wish to take greater risk when they have a long-term time horizon. As they move closer towards retirement, they could decide to gradually reduce risk, and instead focus on stocks that have greater defensive appeal, for example. And, in retirement, obtaining an income may become more important than capital growth.
Investing in the stock market provides them with the opportunity to generate appealing returns, but to also obtain their desired level of risk depending on their personal circumstances. While Bitcoin may have hit the headlines in recent years, and some investors could be sitting on tidy profits, stocks seem to have much greater appeal from a risk/reward basis.
Since stock markets have pulled back from their all-time highs of 2018, now could be the perfect time to get started with a diverse portfolio of companies that offer appealing risk/reward ratios.
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