Crypto vs. stocks: What’s the better choice for you?

The surge of cryptocurrency has captivated global attention, particularly in recent years. Its total market value, which soared to around $3 trillion in 2021, currently hovers near $1 trillion, as reported by CoinMarketCap.com. Bitcoin leads this digital currency landscape, boasting a valuation exceeding $400 billion. This digital gold rush has attracted numerous investors, many venturing in with limited knowledge but high hopes.

The swift rise in cryptocurrency values has led investors to reevaluate the role of traditional stocks in their investment portfolios. However, it’s crucial to understand the fundamental differences between these two asset types. Unlike stocks, which represent a share of ownership in a company and are supported by its assets and earnings, most cryptocurrencies lack any tangible backing.

For those considering cryptocurrency investments, it’s vital to comprehend the nature of these digital assets and how they stand in contrast to traditional investments like stocks, known for their proven, long-term stability.

Should you invest in cryptocurrency or stocks?

Every astute investor must fully understand their investment choices. Assessing the risks and potential gains is essential for informed decision-making. Without such knowledge, investing becomes akin to gambling, relying more on chance than strategy.

Below, we delve into the essential aspects that investors should consider when looking at stocks and cryptocurrencies.

Stocks

Owning a stock means holding a piece of a company. It’s easy to get distracted by fluctuating stock prices and the allure of profits, but it’s important to remember that stocks represent legal ownership in a company. This ownership entitles shareholders to a share of the company’s assets and earnings, which underpin the investment and its value.

Understanding stock price movements: The price of a stock changes based on investor predictions about the company’s future performance. While short-term sentiment can drive optimism, a stock’s long-term value hinges on the company’s ability to increase its profits over time. Essentially, a stock’s growth is tied to the success of the company it represents.

For a stock to be a worthwhile investment, the company behind it must demonstrate sustained performance. (This guide offers a step-by-step approach to investing in stocks.)

Here’s what investors need to know about stocks and cryptocurrencies.

Cryptocurrency

Cryptocurrency, with the exception of certain stablecoins, typically lacks backing by tangible assets. This holds true for widely recognized crypto coins like Bitcoin and Ethereum. Cryptocurrencies enable functionalities such as transferring funds to others or utilizing smart contracts, which are programmed to execute once specified conditions are met.

The reason behind the volatility of cryptocurrency prices primarily lies in its lack of asset or cash flow backing. Market speculation, fueled by changing sentiments, is the main driver of price fluctuations in the crypto world. Such shifts can be dramatic, as cryptocurrency value largely hinges on the expectation that it can be sold for a higher price in the future – a concept known as the “greater fool theory of investing.”

For cryptocurrency to be a profitable investment, it requires selling it at a higher price than the purchase price. Essentially, this means the market’s optimism about the cryptocurrency must surpass your own.

Pros and cons of investing in cryptocurrency vs. stocks

Pros of investing in cryptocurrency

• Cryptocurrency’s decentralized structure is a significant draw for many investors, offering a potential safeguard against the inflationary tactics of central banks and governments with traditional currencies like the U.S. dollar or euro. Often dubbed as the “digital gold,” cryptocurrency is valued by some for its perceived ability to hedge against inflation.
• The allure of cryptocurrencies also lies in the potential for substantial returns. Since their inception, several cryptocurrencies have witnessed dramatic price surges, attracting investors. However, this prospect of significant appreciation comes with notable risks.
• The cryptocurrency landscape has evolved from a few initial coins to a vast array of options, fueled by speculative interest. The number of available coins has expanded into the thousands, providing a wide array of investment opportunities.
• Cryptocurrencies are garnering increasing attention from various sectors, including investors, corporations, and governments. For instance, Tesla incorporated Bitcoin into its financial holdings and briefly accepted it as payment. Furthermore, El Salvador made a groundbreaking move by adopting Bitcoin as legal tender in 2021, a decision that has drawn both interest and caution from entities like the International Monetary Fund. This growing acceptance and interest in digital currencies could potentially bode well for investors.

Cons of investing in cryptocurrency

• Cryptocurrencies exhibit substantial volatility, a characteristic of their relatively nascent stage. Their value, not anchored to any tangible asset, fluctuates based on market sentiment, leading to rapid gains or losses. This unpredictability makes their future trading positions uncertain.
• Security concerns are notable in the cryptocurrency realm, despite claims of enhanced safety. High-profile breaches have occurred, and recovering pilfered funds often proves challenging.
• Unlike traditional stocks, cryptocurrencies lack inherent value. They do not possess the backing of physical assets or earnings prospects. Stocks derive their worth from anticipated future earnings and returns to shareholders, a feature absent in digital currencies.
• On the regulatory front, the stance towards cryptocurrencies varies globally. While nations like El Salvador have adopted Bitcoin, others, including China, have imposed outright bans. There is a possibility of more countries following suit, and jurisdictions like the U.S. are moving towards regulation.

Pros of investing in stocks

• Stocks have a proven history of yielding robust investment returns. Historically, the S&P 500 index has shown an average return of around 10 percent over extended periods. While short-term volatility is a factor, stocks typically offer stability when held over longer durations.
• Stocks signify a share of ownership in a company, with their value tied to the company’s performance. The assets and earnings of these companies generate what is known as intrinsic value, benefiting investors.
• Investing in stocks has become more accessible than ever. Many online brokerage platforms now offer zero trading fees. Investors have the option to buy individual stocks or invest in a broad range of stocks through index funds, which are cost-effective and enable building a diversified portfolio, even with limited funds.
• The stock market is subject to stringent regulation. Stock exchanges, brokers, and listed companies fall under the oversight of various government agencies, including the Securities and Exchange Commission, which mandates companies to disclose specific information to investors. While no regulatory system is flawless, the long-established nature of the stock market ensures significant investor protections.

Cons of investing in stocks

• Holding a diverse array of stocks through index funds generally results in lower volatility compared to cryptocurrencies. While individual stocks may exhibit higher volatility, they typically don’t reach the levels seen in the crypto market. This inherent volatility in stocks underscores the importance of a long-term investment strategy, allowing time to balance out short-term market fluctuations.
• Regarding potential gains, broad stock indices like the S&P 500 usually offer more modest returns compared to the high-gain potential occasionally seen in cryptocurrencies. Historically, stocks have yielded returns around 10 percent over extended periods. In contrast, it’s not rare for cryptocurrencies to experience a 10 percent shift within a single day.

Other considerations when investing in stocks vs. crypto

Time horizon

The length of time you plan to invest, commonly known as your investment horizon, is a crucial factor to consider. If your investment period is short, it’s wise to choose safer assets to ensure your funds are available when needed. Assets with high volatility are less appropriate for short-term investment plans. Typically, it’s advised that investors committing to riskier assets like stocks should have a minimum timeframe of three years to weather market fluctuations.

Stocks

• Stocks typically exhibit volatility, yet they are usually less prone to fluctuations compared to cryptocurrencies. When considering individual stocks, they display more volatility in comparison to a diversified stock portfolio, which benefits from the principle of diversification.
• Stock investments are ideally suited for individuals who are capable of investing their funds without the necessity of accessing them in the short term. The effectiveness of stock investments generally increases with the length of the investment period.
• It’s important to note that not all stocks exhibit the same level of volatility. Growth stocks, for instance, are known for their higher fluctuation rates compared to value stocks or stocks that consistently pay dividends.
• As investors’ financial needs evolve, especially as they near retirement and their focus shifts towards accessing their investments, there’s a tendency to move from more volatile, aggressive stocks (like growth stocks) to more stable options (such as dividend stocks).

Cryptocurrency

• Stocks are known for their volatility, but cryptocurrencies like Bitcoin take this to an extreme. In 2021, for instance, Bitcoin’s value plummeted by over 50% in just a few months, only to surge by 100% later. This level of fluctuation renders cryptocurrencies a poor choice for those looking at short-term investments.
• Cryptocurrencies are more apt for investors who have the patience to wait out the market’s highs and lows. These assets are better suited for a long-term strategy, focusing on years, not weeks.

Portfolio management

When building your investment portfolio, consider that it’s not necessary to choose exclusively between cryptocurrencies and stocks, or other assets like bonds or funds. The key is to balance your portfolio according to your risk tolerance and investment time frame.

Cryptocurrency

• Considering the risks associated with cryptocurrency, it’s advisable to allocate a minor portion, ideally no more than 5 percent, to it within your overall investment portfolio.
• Such a modest investment can potentially yield substantial benefits if cryptocurrency experiences significant growth. Moreover, this limited allocation acts as a safeguard, minimizing your losses should the value of cryptocurrencies plummet.
• Should your crypto investments become a major part of your portfolio due to their growth, you might consider rebalancing by investing more in stocks, thereby reducing the overall risk of your portfolio.

Stocks

• A diversified portfolio predominantly composed of stocks is generally recommended for long-term investors, especially for those with many years before needing to access their funds. Stocks have historically shown robust performance over extended periods.
• For those opting to invest in individual stocks, thorough research is key to realizing favorable returns.
• On the other hand, investing in funds, particularly in a widely diversified option like an S&P 500 index fund, can offer the potential for substantial returns with less need for intensive research.

Conclusion

Several cryptocurrencies have experienced significant price increases since their inception in recent years. However, it’s crucial for investors to comprehend the nature of their investments rather than simply following the crowd. When considering a venture into cryptocurrency, it’s important to assess how it aligns with your personal risk appetite and financial objectives. It’s possible to achieve satisfactory returns without delving into cryptocurrency investments. Notably, even renowned investors like Warren Buffett have chosen to steer clear of the cryptocurrency market.

Disclaimer for Editors: It is recommended that all investors undertake their own independent investigation into various investment strategies prior to making a decision to invest. Furthermore, investors should be aware that historical performance of investment products does not assure future growth in value.