A columnist for The Motley Fool Kate space about, how to choose between two types of risky assets. Bitcoin became the subject of perhaps the largest amount of controversy in the investment world. His supporters believe, what cryptocurrency could destroy the financial industry, and point to the staggering rise of bitcoin in recent years. Critics emphasize the volatility of bitcoin (Bitcoin) and related risks.
Exactly such arguments, as for, and against, sound in relation to other type of assets: shares of biotechnology companies. Some investors see them as a great way to earn a lot of money on innovative products, while others are afraid of the high level of risk and volatility.
Which of these two prospective, but potentially risky assets will be investment — more sensible choice of the investor?
The risks and volatility
To understand, what caused the volatility of bitcoin and what are the most serious risks, associated with the cryptocurrency, first, you need to understand, what is bitcoin and how does it work. If you have not yet done so, features a section on the website the Insider.
There are three main risk, associated with investments in bitcoin.
- Authorities may prohibit the use of uncontrolled by digital currencies. Bitcoin has experienced a serious drop after the ban ICO and closing kryptomere in China. If the authorities continue to tighten the screws or Japan, The US and South Korea, the three largest trading market bitcoin, impose any restrictions, prices will fall.
- Other cryptocurrencies bitcoin take market share. The air now occupies second place in terms of capitalization, and it does have some advantages compared to bitcoin, which prove attractive to investors.
- The company and the stock exchange, focused on the bitcoin, can be vulnerable to cyber attacks. Two such attacks in the past led to falling prices for bitcoin and contributed to the increase in volatility.
Individual biotech stocks also face significant risk and volatility. A key risk relates to concerns about the safety of their drugs. For example, shares of Intercept Pharmaceuticals (NASDAQ: ICPT) recently fell after, as the Management on sanitary inspection behind quality of foodstuff and medicines of the USA (FDA) The FDA warned about the risks, associated with its drug Ocaliva of liver disease. In the case of Intercept, Ocaliva already been approved by the FDA. However, many biotech companies are faced with the fact, what safety problems or lack of effectiveness of drug, discovered during clinical trials, do not allow them to bring products to market.
In addition, there's always a probability, what other company will release a competing product and take away market share. Even the threat of this can cause damage to the shares of biotech company.
The problem may become too high and the effectiveness of the drug. For example, during the period from mid 2015 to mid 2017 the shares of Gilead Sciences fell more than 40%. This was mainly due to the reduction in sales of the drug against hepatitis C: the medication managed to cure so many patients, the market, Gilead has declined significantly.
So, what's riskier, bitcoin or biotechnology? The action of individual biotech companies, apparently, bearing more risk, than bitcoin. At the same time, you can buy shares of exchange-traded Fund, focused on biotechnology. Usually such stocks are less volatile, than bitcoin, and carry less risk for the investor.
The dynamics of the stock
If we talk about the growth rate, between bitcoin and biotech shares little in common. The first bitcoin stock exchange appeared in 2010 year. If you bought bitcoins on $10 haven't sold them until now, now your condition would be equal to approximately 13,9 million dollars. In other words, the average annual profit would exceed 650%. Hard to find stock in a biotechnology company, who for same time have risen in price at least 10 times.
However, most investors wouldn't buy bitcoin shortly after its occurrence. What's happening lately? Here's how they look in 2017 year the dynamics of the NYSE Bitcoin Index, exchange-traded Fund SPDR S&P Biotech ETF and stock one of the fastest growing companies Puma Biotechnology (NASDAQ: PBYI).
Obviously, what is bitcoin anyway going up faster, than stock biotech companies. However, it should be taken into account, this profitability is tied to high volatility.
What to choose
Investors make decisions, given the balance of risk and return. Comparing the two asset, they should determine, which one will provide the best profit potential given the adopted risk. Until now, bitcoin has demonstrated the best risk-return ratio, than stock biotech companies. But I will continue to do it? There is no certainty.
Do not expect, in the future bitcoin will generate the same annual income, as in the past. On the other hand, the level of risk can be reduced, as digital currencies will become more prevalent. Possible, keep a small part of the investment in bitcoins is a good move. However, it is understood, that this is pure speculation.
If you are interested in big profits, worth buying the shares of biotech companies. Achievements, that make a biotech company, incredible. Possible treatment of serious diseases is now more, than ever.
Buying shares in a biotech exchange-traded Fund is a good way to capitalize on this, but with less risk and volatility, than when investing in individual stocks.
So what to choose? Possible, the best option is to invest a little in bitcoin, and biotechnology.
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