Stocks and cryptocurrencies are two popular investing options, but which is the better option? We’ll compare crypto vs stocks in this article so you can get a better understanding of both.
Cryptocurrencies have been increasingly gaining popularity with the average investor, who up until recently has tended to entrust their capital to more traditional investment channels, one of the most common being stocks.
While both stocks and crypto are on the more liquid and speculative end of the spectrum there are significant differences between the two. Investors need to understand these differences so that they can use the best strategic approach for each asset type.
Here are the key things investors need to know about stocks and cryptocurrency.
Stocks
A stock is a fractional ownership interest in a business. It’s easy to lose sight of this, if you become overwhelmed by the wiggling stock prices — and the potential for profit. As a legal ownership stake in the business, the stock gives shareholders a claim on the assets and cash flow of the business. These back your investment and provide a basis for its valuation.
Why stocks rise and fall: A stock price moves as investors assess the future success of the company. While investors may become overly optimistic about the stock in the short term, the stock price ultimately depends on the company’s ability to grow its profits over the long term. That is, a stock rises in the long term due to the success of the underlying company.
For a stock to be a successful investment, the underlying company must perform well over time. (Here’s a step-by-step guide for how to invest in stocks.)
Cryptocurrency
Generally, cryptocurrency is backed by no hard assets (specialized stablecoins being an exception), and that’s the case for the most popular crypto coins such as Bitcoin and Ethereum. A cryptocurrency may allow you to perform certain functions, such as sending money to another person or using smart contracts that automatically execute after specific conditions are met.
Why cryptocurrency rises and falls: Because cryptocurrency is not backed by assets or cash flow, the only thing moving crypto prices is speculation driven by sentiment. As sentiment changes, prices shift — sometimes drastically. So cryptocurrency is driven only by the hope that someone will buy it for more in the future — what’s called the “greater fool theory of investing.”
For a cryptocurrency to be a successful investment, you must get someone to buy it from you for more than you paid for it. That is, the market must be more optimistic about it than you are. (Check out this beginner’s guide to investing in cryptocurrency.)
Pros and cons of investing in cryptocurrency vs. stocks
Pros of investing in cryptocurrency
- Possible hedge against fiat currency: For some investors, one of the biggest appeals of cryptocurrencies is its decentralized nature. It’s not controlled by central banks or governments who like to print money and generate inflation in fiat currencies such as the U.S. dollar or the euro. Cryptocurrency has been called “digital gold” by some investors who hold it because they think it will protect them from inflation.
- Potential for outsized gains: Buying cryptocurrencies creates the potential for large gains on your investment. Several cryptocurrencies have seen their prices skyrocket since first being introduced. These gains are the main reason people are attracted to cryptocurrencies, but the potential for price appreciation comes with significant risk.
- Growing number of coins: In the early days of cryptocurrencies, there were just a few coins that could be invested in, but the speculative interest has changed that. New coins are introduced regularly and there are now thousands to choose from.
- Wide interest in digital currencies: There seems to be a growing interest in cryptocurrencies from investors, companies and governments. Tesla holds Bitcoin on its balance sheet and briefly accepted the digital currency as payment before reversing course. El Salvador adopted Bitcoin as legal tender in 2021, though the International Monetary Fund has urged the country to reverse its decision. Increasing acceptance of digital currencies could be positive for investors.
Cons of investing in cryptocurrency
- Extreme volatility: Cryptocurrencies have been extremely volatile so far in their relatively young existence. They aren’t backed by anything, so the price they trade at is determined by the whims of traders. Fortunes can be made and lost quickly and there’s no telling where a coin might trade next.
- Cybersecurity risks: Despite cryptocurrency enthusiasts touting the security benefits of digital coins, there have been notable hacks involving cryptocurrencies. It is often difficult to recover stolen funds.
- No intrinsic value: Cryptocurrencies have no intrinsic value, which means they aren’t backed by underlying assets or earnings the way that stocks are. Stocks have value because of their future earnings power and what they will return for their owners, while cryptocurrencies offer nothing of the sort.
- Regulatory risks: While El Salvador has embraced Bitcoin, many governments are much more skeptical about cryptocurrencies. China has banned them altogether and other countries could follow suit.
Pros of investing in stocks
- Long history of solid returns: Stocks have a long track record of producing solid investment returns, with the S&P 500 returning about 10 percent over the long-term. Though stocks can be volatile in the short term, they have generally been safe to hold over long periods of time.
- Have intrinsic value: A stock represents an ownership interest in a company and its value over time depends on the success of the underlying company. Companies own assets that produce earnings and cash flow for investors, creating what’s known as intrinsic value.
- Accessible: It is easier than ever to invest in stocks these days with many online brokers cutting trading fees to zero. You can invest in individual stocks or choose to purchase a diversified basket of stocks through an index fund. Index funds help keep costs low and you can build a diversified portfolio even if you don’t have much money to start with.
- Stronger regulation: Stock exchanges, brokers and companies are all heavily regulated through various government agencies. Companies are required to provide certain information to investors through the Securities and Exchange Commission. No regulatory body is perfect, but stocks have been around for a long time and there are certain investor protections in place.
Cons of investing in stocks
- Volatile: When you hold a broad basket of stocks through index funds, stocks are less volatile than cryptocurrencies. Individual stocks can be more volatile, but typically less so than cryptocurrencies. Because of this volatility, stocks are best held as part of a long-term investment plan, so you have time to recover from any short-term losses.
- Lower potential for extreme gains: Broad stock indexes like the S&P 500 likely have less potential for the extreme gains that can sometimes be found among cryptocurrencies. Stocks have returned about 10 percent over the long term, whereas it’s not uncommon for cryptocurrencies to move 10 percent in a single day.
Crypto Vs Stocks : Which Is A Better Investment?
If you have the extra funds, investing in both may be the best concept. Many experts recommend that you allocate the majority of your portfolio to lower-risk assets (index funds). You may decide to allocate a small portion of your portfolio to speculative capital, which is invested in high-risk, high-reward assets such as cryptocurrency.
It is entirely up to you how much of your assets are speculative, but experts recommend no more than 5%. You should only invest in these assets if you don’t need the money right away.
The advantage of diversifying your portfolio with blockchain is that if the value of cryptocurrency skyrockets, the 5% you put into it will experience great returns and enhance your overall portfolio.
Conclusion
Cryptocurrency dominates most of the talk among novice investors, which may lead them to overlook the tried and true long-term wealth-building world of equities. Investors, on the other side, may be missing out if they ignore cryptocurrency entirely.
Your individual financial position, especially your timeline, risk appetite, and objectives, will help define the ideal approach for you, as with any investment.
This is all from our side regarding Crypto vs Stocks. Let us know your views in the comment section.