The New York Stock Exchange (NYSE) was founded in 1792. Bitcoin, widely acknowledged as the pre-eminent cryptocurrency, was first issued in 2009. According to Statista, the total market cap of the NYSE was just under $28 trillion at the end of December 2021. Meanwhile, the total market cap for cryptocurrencies peaked at just under $3 trillion in the same month.
In other words, the market cap of crypto went from zero to the equivalent of just under 11% of the total market cap of the 230-year old NYSE in just under 12 years. This is why so many investors are hungrily eyeing the cryptocurrency marketplace as an alternative investment with which to diversify portfolios.
However, does this meteoric rise really mean crypto is a smart investment?
Let’s take a look at crypto vs. stock investments.
Perhaps the most significant difference between the two is the fact that investing in the stock market buys you something tangible. A share of stock in a company is a security that entitles the purchaser to a degree of ownership in the company. It conveys voting rights in how that company is run, it also warrants the owner of the share a percentage of the profits the company earns, which is usually paid in the form of dividends.
Earnings are a measure of the value of a company, along with the nature of its management team and forecasts of the organization’s potential for future gains. This can be predicated upon the competitive stance the company enjoys, the market’s perception of its management team and whether or not the company offers something the world currently needs in abundance, or is expected to need in the near future.
Cryptocurrencies on the other hand (with but one exception, certain varieties of crypto security tokens) are backed by little more than investors’ faith in the strength of a given currency. The Securities and Exchange Commission does not regulate the market. Purchasing digital currencies entitles the investor only to the perceived value of the currency in question at any given moment in time.
The vast majority of cryptocurrency investments are subject to the whims of the marketplace, which in part explains the extreme volatility of the asset class. Take Bitcoin for example; the value of a single coin stood at $67,900 in November of 2021. The price, as of this writing (February 2022), currently stands at $39,264.
That’s a drop of $28,636 in less than four months. Wild swings in value are part and parcel of the still emerging cryptocurrency market. On the one hand, this volatility means buying at the right time and holding on could potentially net you a significant gain. However the inverse is a very real possibility as well.
This brings us to the pros and cons of investing in stocks vs. crypto assets.
1. Regulation – A governmental authority — the Securities and Exchange Commission — regulates the market. This means investors enjoy a degree of assurance that the securities they purchase are real. The SEC requires market participants to regularly disclose significant information so that investors have timely, accurate, and complete information to make confident and informed decisions about when or where to invest.
2. Less volatility – As a whole, stock market investors tend to be inclined to buy and hold. Yes, stocks do rise and fall in value, but they tend to do so in a somewhat predictable fashion. There are mountains of data for investors to sift through in order to make a somewhat knowledgeable judgment before committing to an investment. Moreover, there are index funds, mutual funds and exchange-traded funds in which to invest to help mitigate risk.
3. Liquidity – One can buy and sell a stock whenever they’d like for the most part. There’s almost always a ready market. Yes, if timed poorly a sale could result in a loss. However, you can get out of a stock investment pretty much whenever you’d like.
4. Diversity – The stock market covers the vast majority of industrial pursuits extant. This makes it possible to spread your investments over a broad swath of the economy. This also gives you the capability of limiting your investments to areas in which you have a high degree of familiarity, which makes it easier to be an informed investor.
5. Transparency – Participating companies are required to provide regular financial updates, host shareholder meetings and update shareholders regarding performance (both past and present) and forecast future earnings.
6. Ease of Entry – Stocks are easy to buy and you don’t need a whole lot of money to start out as an investor.
7. Inflation Hedge – The value of stocks tends to grow right along with the economy. A robust economy creates more wealth, which leads to more purchases, which translates to higher share prices. This helps the stock market keep pace with inflation.
1. Risk to Reward Ratio – Generally speaking, the less risky an investment the lower the anticipated gains will be. While this does provide investors with a measure of stability, it can also limit earnings potential. Meanwhile, the more risk an investor is willing to take on, the higher the potential anticipated return. This means investors must be willing to accept a higher potential for loss to hope to achieve significant gains.
2. Volatility – While less so than that of the cryptocurrency market, the stock market is subject to unanticipated fluctuations just the same. World events such as the threat of war, the results of a presidential election, pandemics and the like can come out of nowhere to impact the market — and your investments — negatively.
3. Market Access – Yes, it is possible to trade globally at all hours of the day and night. However, if you’re primarily interested in the market in a certain country — the United States, for example — you’re restricted to regular business hours on the east coast.
4. Learning Curve – The downside to the abundance of information available about potential investments is the amount of time you’ll need to thoroughly research a company before putting money into it on your own. Many people get around this by investing in funds rather than individual companies. However, if you’re going it alone, and stock by stock, you’ll need time to conduct the proper due diligence.
5. Taxes – Capital gains taxes are hard to avoid. By and large, if you make money in the market, those funds will be subject to taxation.
6. Fees – You’ll pay a fee to buy a stock and you’ll pay again to sell it — in many cases. There has emerged a new paradigm in which certain classes of investors can trade fee-free, but you’ll still pay a brokerage to manage your accounts.
7. Patience – It can be hard to stand pat when you see the value of an investment sinking. However, experts will tell you the worst time to sell a stock is when its value is declining. This is because everyone around you is selling, so you won’t get a decent price. The stock market ebbs and flows, and watching it every day can shred your nervous system. You’re best served approaching the stock market as a long-term investment.
1. Potential Upside – Again, the value of a Bitcoin went from zero to $67,000 in 12 years. Early adopters, who took Bitcoin mining seriously, literally minted money. A term you often hear associated with digital assets is volatility. While typically posited as a negative, volatility may work for you too. The key is knowing when the currency you’re holding is in a trough and when it’s at a peak.
2. Low Barriers to Entry – Crypto exchange platforms have made buying and selling the currencies quite easy. You don’t need to be particularly computer savvy to trade crypto.
3. Market Diversity – While you tend to hear the most about Bitcoin and Etherum, there exists a broad array of cryptocurrencies in which to invest. However, you have to be careful. A shakeout is bound to come eventually because the market is so young. Some currencies will make it and some won’t. Spreading your investment over a number of the strongest ones should serve you best in this regard and can act as a hedge against valuation swings.
4. Market Optimism – The government of El Salvador declared Bitcoin legal tender in 2021. Tesla has a significant amount of its holdings in Bitcoin as well. This expresses considerable confidence in the market by two reasonably powerful entities.
1. Volatility – That same volatility that could buoy you to incredible earnings could also wipe you out — completely. Remember how we were saying that physical assets back stocks, and that the market is regulated quite heavily? That is not the case for crypto. It’s a highly speculative market, which rises and falls right along with the moods and concerns of its investors. What’s more, crypto holdings are only worth what the public perceives the value of them to be at a given moment in time.
2. Hackers – The cryptocurrency infrastructure is based upon a technology known as blockchain. Without getting too technical, the nature of blockchain and the way it functions make it one of the most secure database constructs ever devised by humankind.
However, anything one human being can devise, another can figure out. This is not to say blockchain is inherently flawed, again, it’s one of the most robust security schemes the digital world has developed to date. As well crafted as it is though, any security measure is only as robust as its most lax user. And, there have been incidents of cryptocurrency exchanges being hacked.
Granted, this is an issue for stock exchanges and Fortune 500 companies as well. However the difference is when a hacker infiltrates a cryptocurrency exchange they can make off with millions of dollars. Moreover, when crypto exchanges get hacked, they can be driven out of business and your holdings can go right along with them.
3. Lost/Forgotten Passwords – Like everything else digital, access to cryptocurrency accounts is password protected. Owners of cryptocurrency keep their holdings in digital wallets. There are “hot” wallets and “cold” wallets. Hot wallets reside online and cold wallets are hard drives that can be disconnected from the Internet. This renders them more secure because hackers can’t get to them as easily.
However, your funds could be lost forever if you forget the passcodes to your wallet. Earlier this year, the story of a longtime investor circulated the ‘net who was two wrong password attempts away from losing over $200 million in crypto because he’d forgotten the password he used to set up his account a decade prior. Another investor lost around $20 million when a colleague unknowingly reformatted the hard drive on the investor’s laptop.
4. Longer Time Horizons – While it’s possible to make a quick hit in the crypto markets and extract profits, the volatility of the marketplace tends to favor those who can buy and hold. In fact, there’s a term for this in crypto circles: “HODL”. The acronym was coined when a crypto investor misspelled the word “hold” in a forum post. However, it caught on and has come to represent the phrase Hold On for Dear Life. The gist of it being holding on to a crypto investment can likely yield a better return than churning and burning.
As you can see, both asset classes have their pluses and minuses. By and large though, the nod for stability goes to the stock market. It has a longer track record, there are more ways to be certain of the nature of your investment and the regulation aspect of investing in the market is appealing too. Especially if your goal is long-term growth.
On the other hand, crypto does have strong potential as an alternative investment. Toward that end, most experts recommend limiting crypto to 10 percent of your portfolio if you’re just starting out and have time to ride the tides. Those same people say veteran investors nearing the time when they’ll need to derive an income from their investments should keep crypto to 5% of their holdings.
Meanwhile, there are a number of other alternative investment options with longer track records, many of which have been proven over time. Yieldstreet, for example, offers a curated selection of alternative investment opportunities that were previously only available to institutions and the ultra-wealthy. This is true whether you’re looking to generate income, grow your overall portfolio value, or achieve some combination of both.
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