Cryptocurrency has been making headlines for the past few years, with its total value reaching a staggering $3 trillion in 2021, according to CoinMarketCap.com. Although it has now fallen to about $1 trillion, it’s still a massive market with Bitcoin leading the way, worth more than $400 billion. As a result, many investors have been drawn to this digital gold rush, hoping to strike it rich.
But with such rapid appreciation comes skepticism, leaving many investors to wonder about the place of stocks in their portfolios. After all, there are significant differences between the two investment types. The most critical distinction is that a stock represents an ownership interest in a business, backed by the company’s assets and cash flow, while cryptocurrency, in most cases, has no backing at all.
If you’re considering buying cryptocurrencies, it’s essential to understand what you’re getting into and how it compares to traditional investments such as stocks, which have a proven long-term track record. So, let’s take a closer look at cryptocurrency and stocks to see what investors need to know before diving into either market.
Should You Invest in Cryptocurrency or Stocks?
Smart investors know exactly what they’re investing in. To make a successful investment, you have to weigh the risks and rewards. They can’t make calculations without these kinds of details. It’s more like gambling than investing in this case.
Here are the most important things investors need to know about stocks and cryptocurrencies.
When you invest in stocks, you’re buying a small piece of ownership in a company. This means that you’re entitled to a share of the company’s assets and profits. The value of a stock depends on how well the company performs over time. If the company is successful, the stock price will likely rise, and vice versa.
To be a successful stock investor, you need to be patient and focused on the long-term success of the company. Don’t get too caught up in short-term fluctuations in stock prices, as these can be misleading. (Here’s a step-by-step guide for how to invest in stocks.)
Cryptocurrency is a digital asset that’s not backed by any physical assets or cash flow. It’s value is based solely on speculation and sentiment. This means that the price of cryptocurrency can be extremely volatile and subject to drastic fluctuations.
If you’re considering investing in cryptocurrency, it’s important to do your research and understand the risks involved. You should only invest money that you can afford to lose, as the market is highly speculative and unpredictable.
In order to be successful in cryptocurrency, you need to be able to sell it for more than you paid for it. This requires a deep understanding of the market and the ability to anticipate shifts in sentiment. (Check out our beginner’s guide to investing in cryptocurrency.)
So, which one is right for you? It ultimately depends on your investment goals and risk tolerance. If you’re looking for a long-term investment that’s based on the success of a company, stocks may be the way to go. But if you’re willing to take on more risk for the potential of higher rewards, cryptocurrency may be worth considering.
Regardless of which option you choose, make sure to do your due diligence and invest wisely.
Pros and Cons of Investing in Cryptocurrency vs. Stocks
Pros of investing in cryptocurrency
- Decentralized Nature: One of the biggest appeals of cryptocurrency is its decentralized nature. Unlike fiat currencies such as the U.S. dollar or the euro, crypto isn’t controlled by central banks or governments who like to print money and generate inflation. This makes crypto more attractive to some investors, who see it as a potential hedge against inflation. In fact, some investors refer to crypto as “digital gold” because they believe it will protect them from inflation.
- Potential for Large Gains: Buying cryptocurrencies has the potential for large gains on your investment. Some cryptocurrencies have seen their prices skyrocket since first being introduced. Of course, the potential for price appreciation comes with significant risk, but the possibility of significant gains is a big draw for many investors.
- Increased Options: In the early days of cryptocurrencies, there were just a few coins that could be invested in. However, the speculative interest in crypto has changed that. New coins are introduced regularly, and there are now thousands to choose from. This increased selection gives investors more opportunities to find a coin that aligns with their investment strategy.
- Growing Interest: Finally, there seems to be a growing interest in cryptocurrencies from investors, companies, and governments. Tesla holds Bitcoin on its balance sheet, and El Salvador adopted Bitcoin as legal tender in 2021. While 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
- No Income or Earnings: Unlike stocks or bonds, most cryptoassets do not provide any kind of income or earnings. This means that you’re solely reliant on the market to determine the value of your investment. If the market is in a good mood, you could see significant gains, but if it’s not, you could suffer substantial losses.
- Volatility: Cryptoassets are known for their extreme volatility, with prices sometimes fluctuating by double-digit percentages in a single day. It’s essential to be able to stomach this kind of volatility if you want to be successful with crypto investing. If seeing the value of your investment drop 30%, 50%, 70%, or even 90% would make you nervous or cause you to sell out at the bottom, crypto investing may not be for you.
- Complicated Assets: Cryptoassets are incredibly complex and can be challenging to understand fully. Unlike traditional investments like mutual funds or bonds, which can be relatively straightforward, crypto investing requires a deep understanding of blockchain technology and the various factors that affect the price of different cryptocurrencies. This can take a considerable amount of time and effort to learn, and not everyone has the time or inclination to invest this kind of effort.
- Counterparty Risk: Finally, there’s the issue of counterparty risk. When you invest in a traditional brokerage account, your investments are protected against fraud by the Securities Investor Protection Corporation. However, if you invest in crypto and leave your assets on an exchange that goes out of business, there’s a real risk that you could lose your investment entirely. There’s no FDIC or SIPC backing up crypto exchanges, so it’s essential to be careful about where you choose to invest and how you protect your assets.
- Scammers and Manias: Crypto investing is a risky venture as it’s full of scammers and manias. These scammers often target unsuspecting investors who are new to the market. Thus, it’s important to be careful and to have your head on a swivel. Do your research, stay informed, and be wary of anything that seems too good to be true.
- Uncertain Government Regulations: Governments around the world are still figuring out how to deal with crypto assets. Some countries have banned Bitcoin outright, and others have a de facto ban. As the rules and regulations around crypto assets continue to evolve, it can have a serious impact on the value of your investment.
- The Newness of Crypto Assets: Most crypto assets have only been around for a few years. Even Bitcoin is still relatively new since the global financial crisis of 2008. Some smart investors view the entire crypto space as a bubble, and there is a possibility that they’re right. Long-term returns may be poor or even negative, and many investors may lose their money.
- Risks in Crypto Investing: While the blockchain adds some security to crypto assets, there are still other risks involved. Losing your key or having it stolen through hacking or phishing can result in significant losses with little recourse.
Pros of investing in stocks
- Corporate Earnings Grow with the Economy: When the economy grows, companies tend to earn more money. Economic growth leads to job creation, which in turn creates more income and consumer demand. This drives more revenue into companies’ cash registers. Understanding the different phases of the business cycle can help you make informed investment decisions.
- Long-Term Returns are Generous: Historically, stocks have yielded a generous annualized return over the long term. For example, the S&P 500’s 10-year annualized return as of January 31, 2022, was 15.43%, which is better than the average annualized inflation rate. However, it’s important to have a long-term investment horizon and be prepared to hold onto your stocks even if their value temporarily drops.
- Stocks are Easy to Buy: Buying stocks is easy, and you can do it through a broker, financial planner, or online. Once you set up an account, you can buy shares in minutes. If you’re a small business owner, you may even be able to invest in stocks through your business.
- Stocks are Liquid: The stock market allows you to sell your shares quickly and with low transaction costs. This is important if you need to access your money suddenly. However, it’s important to note that prices can be volatile, so you may face losses if you need to sell your shares during a market downturn.
- Regulations Offer Investor Protections: Stock exchanges, brokers, and companies are heavily regulated by government agencies. Companies are required to provide certain information to investors through the Securities and Exchange Commission, and there are certain protections in place for investors. While no regulatory body is perfect, these regulations offer important safeguards for investors.
Cons of investing in stocks
- You Could Lose Your Entire Investment: One of the biggest risks of investing in stocks is the possibility of losing your entire investment. If a company performs poorly, investors will sell, and the stock price will drop, causing you to lose your initial investment. If you can’t afford to lose your money, then you should consider buying bonds or other safer investments.
- Research and Monitoring are Required: If you decide to invest in stocks, be prepared to do your research. You will need to study each company you’re interested in and determine how profitable it may be before buying its stock. Additionally, you will have to follow the news for any significant developments and monitor the stock market’s performance regularly.
- Capital Gains Taxes: If you sell your stock for a profit, you will be liable to pay capital gains taxes. On the other hand, if you sell your stock for a loss, you may be able to get a tax break.
- Limited Potential for Extreme Gains: While stocks can offer a decent return over the long term, they generally have less potential for the extreme gains that can sometimes be found in other investments such as cryptocurrencies. It’s essential to understand that investing in stocks is a long-term game, and patience is key.
Other Considerations When Investing in Stocks vs. Crypto
When choosing between investing in stocks or cryptocurrencies, there are several important considerations to keep in mind. Here are three key factors to consider before making your investment decision:
1. Fees and Regulations
One of the most significant differences between stocks and cryptocurrencies is the fees and regulations associated with each. Stock exchanges are heavily regulated, which helps to protect traders and investors and keep the playing field fair. However, this also means that there are fees and costs associated with traversing the stock exchange, including broker fees, bank fees, and taxes on capital gains.
In contrast, trading on cryptocurrency exchanges incurs relatively few costs. Transactions on the blockchain only require mining fees, and exchanges incur lower costs when buying and selling cryptocurrencies than brokers do for stocks. However, the lack of regulation in the cryptocurrency market is a concern for some investors, and it remains to be seen what kind of rules and regulations will be applied to this marketplace in the future.
2. Time Horizon
Your time horizon – when you need the money from an investment – is another critical consideration when deciding whether to invest in stocks or cryptocurrencies. If you have a short timeline, you need a safer asset that will be there when you need it, and the more volatile an asset, the less suited it is for those with a short timeline. Generally, experts recommend that investors in risky assets such as stocks should have at least three years to ride out volatility.
Stocks are often volatile, but they tend to be less volatile than cryptocurrencies. Stocks are better suited to investors who can leave their money alone and don’t need to access it. The longer you can leave your money invested, the better. However, some stocks are more volatile than others, so you may want to consider investing in value or dividend stocks instead of growth stocks if you need to tap your money, such as when you approach retirement.
Cryptocurrencies are incredibly volatile, with wild price swings in a short amount of time. This makes them unsuitable for short-term investors. Crypto is better suited to traders who can leave their money tied up and wait for it to recover. If you want to invest in cryptocurrency, think years rather than weeks.
3. Portfolio Management
When constructing your portfolio, you don’t have to choose between stocks or cryptocurrencies. Instead, it’s all about weighting your portfolio in a way that fits your risk and time horizon. Cryptocurrency carries inherent risks, so it’s best to have a small allocation in your overall portfolio. Think 5 percent or less.
Even a small allocation could do wonders for your portfolio if cryptocurrency really takes off. However, limiting your investment to a small allocation also protects you against a complete loss if crypto goes to zero. If crypto grows to be a significant portion of your portfolio, you can re-allocate more of your money to stocks to lower your portfolio’s overall risk.
Given stocks’ strong long-term record, a diversified collection of stocks should make up the majority of your portfolio, especially if you have decades until you need to tap it. If you’re investing in individual stocks, you’ll need to research your stocks carefully to achieve good returns. If you’re investing in funds, you can buy a broadly diversified fund such as an S&P 500 index fund without significant research and enjoy the potential for high returns.
While cryptocurrencies have skyrocketed in value over the past few years, it’s crucial to understand what you’re investing in before jumping in blindly.
If you’re considering investing in cryptocurrency, take the time to evaluate your own risk tolerance and financial needs. Cryptocurrencies may offer potentially high returns, but they also come with significant risks. On the other hand, there are plenty of other investment options that can provide good returns without the added volatility of crypto.
It’s worth noting that even seasoned investors like Warren Buffett have expressed their reservations about cryptocurrency, citing concerns over its lack of intrinsic value and regulatory uncertainties.
Ultimately, the decision between cryptocurrency and stocks comes down to your personal preferences and investment goals. Regardless of which option you choose, it’s always wise to do your due diligence and seek professional advice before making any investment decisions.
Cryptocurrency vs. Stocks FAQs
How does a cryptocurrency exchange work?
A cryptocurrency exchange is an online marketplace where people can buy or sell cryptocurrency. Different exchanges will have different fees and offer different cryptocurrencies, although Bitcoin is the most popular and can be found on most exchanges.
It’s important to note that a cryptocurrency exchange is not the same as a cryptocurrency wallet or a cryptocurrency broker. Most exchanges only allow customers to trade digital assets for other digital assets, although there are some that allow you to exchange cryptocurrencies for fiat currencies like Australian dollars or US dollars.
Should I invest in cryptocurrency?
We cannot provide investment advice on whether or not you should invest in cryptocurrency. Ultimately, you’ll need to take your own personal circumstances into account and make the best decision based on your situation.
Why are cryptocurrency prices different on exchanges?
The price of bitcoin, the most popular cryptocurrency, can vary widely on different exchanges. This is because supply affects the price, so smaller exchanges may have it listed at a higher price due to low supply. Additionally, the price of bitcoin is based on trading and there is no established way to price it. Instead, it’s based on what people are willing to pay.
How does cryptocurrency affect the stock market?
While cryptocurrency is independent of the stock market, some experts believe there is a strong correlation between the price of cryptocurrencies like bitcoin and the stock market. For example, Tesla’s share price rose 2% after the announcement that they would invest in bitcoin, but it has since fallen by 5%. Bloomberg has also noted that the correlation between bitcoin and the stock index remains positive, meaning that the movements of the price of bitcoin are consistent with those in equity markets.
Does cryptocurrency have a future?
No one really knows what the future holds for cryptocurrency, but it doesn’t seem to be going away anytime soon. Mastercard has even revealed plans to start supporting a select number of cryptocurrencies directly on its network in 2021. Perhaps one day crypto will be a common form of payment.
Can you buy crypto on one exchange and sell on another?
Yes, this is known as arbitrage trading. However, it’s not easy and it can sometimes backfire due to time delays and fees. Transactions take time to verify to and from exchanges and verification steps may be required for large amounts of crypto. It’s important to weigh up the pros and cons before considering arbitrage trading.