Bitcoin has trounced traditional investment strategies over one and 10 years “but it remains a speculative gamble” according to new research from Salford investment giant AJ Bell.
The Salford platform said the performance figures of Bitcoin “are close to incomprehensible, and suggest that anyone jumping on the Bitcoin bandwagon now is somewhat late to the party.”
AJ Bell said the future of cryptocurrency “still hangs in the balance” and Bitcoin will have to exhibit far less volatility, gain much greater regulatory approval and achieve a lower carbon footprint before it makes significant inroads into mainstream professional investment portfolios.
It said continued scrutiny of crypto and pressure from regulators on issues of consumer harm, money laundering and carbon emissions may also dent crypto prospects, as could central banks issuing their own digital currencies.
The new AJ Bell Investor Strategy League compares the performance of different consumer investing styles.
It said: “Bitcoin has trounced traditional investment strategies over one and ten years, but it remains a speculative gamble …
“It is followed (not very closely) by a global tech stock portfolio …
“Index investors beat stockpickers in 2021, but over ten years stockpickers are just ahead …
“A strong year for residential property only bags a mid-table spot …
“ESG funds are also mid table, but considerably ahead of sin stock investors …
“Safe haven strategies like cash, gold and bonds are languishing at the bottom of the performance league over one and ten years …
“Warren Buffett has had a good year, but he only just nudges ahead of our random fund picker, Binky the cat.”
AJ Bell head of investment analysis Laith Khalaf said: “Professional investment strategies tend to be characterised according to four main style factors: growth, value, quality and momentum.
“However, it’s clear that consumers have a much broader approach to managing their finances, which encompass not just these stock market factors, but other assets such as cash, property and more recently, cryptocurrencies.
“Some consumers invest actively, others prefer index funds; some follow specialist strategies, while others look to limit risk.
“There’s no exhaustive list of investment styles, and many retail investors will mix and match.
“But there’s a dearth of literature which compares the different strategies that consumers, rather than professional investors, might pursue.
“The AJ Bell Investor Strategy League seeks to address this by looking at the performance of some key styles, strategies and asset classes that ordinary savers might adopt, ranking returns over one and ten years.
“This is the inaugural annual report, and we anticipate it will slowly change over time to reflect new investment trends, but each edition should reveal some of the key factors affecting investor returns and provide some context for financial decisions in the coming year.”
The 2022 AJ Bell Investor Strategy League report said: “The best returning asset of the last year, and indeed the last decade, has been Bitcoin.
“The returns on offer for Bitcoin believers have simply dwarfed other investment options, and a tiny investment could have made you very rich indeed.
“The cryptocurrency also topped the performance table over the last year with a 61.5% return in pounds sterling.
“That’s relatively lacklustre by its own standards, compared to returns of 1,271% in 2017 and 5,758% in 2013.
“The performance figures are close to incomprehensible, and suggest that anyone jumping on the Bitcoin bandwagon now is somewhat late to the party.
“They might still have a jolly good time for a while, but they aren’t going to be quaffing as much champagne and caviar as the early birds.
“In order to generate the same return in the next ten years as the last decade, the Bitcoin price would need to rise to around £380 million per coin, or $520 million, at current exchange rates.
“Far-fetched doesn’t begin to cover it.
“Those who have sat out the crypto craze can console themselves with the fact that the number of Bitcoin believers who have captured the full ten-year return is probably as small as that number is large.
“Ten years ago, Bitcoin was little known, and those who did know about it would have just witnessed the hacking of the Mt Gox Bitcoin exchange in 2011.
“Even if they had been brave enough to buy some coins, to enjoy the entire return of over £11 million on a £1,000 investment, buyers would have had to watch their investment double in value 13 times without cashing in any profits.
“They would also have had to casually sit by and not press the intense panic button as their investment fell by 73% in 2018.
“Indeed in 2010, a US computer programmer called Laszlo Hanyecz reportedly spent 10,000 Bitcoin on two pizzas, in what is widely regarded as the first ever cryptocurrency transaction.
“Those Bitcoins would now be worth over £300 million. This story suggests that even the very early Bitcoin adopters had no real inkling of what was to come.
“The risk with an asset that has appreciated so vastly is of course that the price peaks, and the subsequent fall is just as astonishingly sharp as its ascent.
“One only has to look back just over twenty years to the madness of the dotcom boom to recall companies that experienced rocketing share prices, only to become worthless after the bubble burst …
“Looking forward, the future of cryptocurrency still hangs in the balance.
“Goldman Sachs just issued a fairly bullish note on Bitcoin, which it sees increasingly usurping gold’s role as a store of value.
“But it would have to exhibit far less volatility, gain much greater regulatory approval, and achieve a lower carbon footprint, before it made it significant inroads into mainstream professional investment portfolios.
“Meanwhile the longer-term adoption of crypto as a means of exchange by businesses and consumers is still highly uncertain, especially given its volatility.
“Continued scrutiny and pressure from regulators on issues of consumer harm, money laundering, and carbon emissions may also dent crypto prospects, as could central banks issuing their own digital currencies.
“The golden rule of investing in crypto is not to invest any money you can’t afford to lose.
“And if you get lucky, it’s probably best not to splash out on a bottle of fizz before you’ve got the profits firmly in your bank account in pounds, dollars or euros, because gains can disappear in the blink of an eye.
“So far in the first few days of 2022, the Bitcoin price has already fallen 12%, which suggests it’s still less of an investment strategy, and more of a speculative gamble.”