10 March 2022 • 8 min read
Investments are an effective way to increase wealth, ensuring long-term financial stability and security. And, as many of you reading this will already know, they’re an excellent way to beat inflation. For years, many people have chosen to invest their funds in any number of investment options, from business ventures, real estate, and agriculture to stocks, bonds, funds, and metals.
However, with the emergence of Bitcoin in 2009, the world as we know it changed. Over a decade later, there are almost 18,000 cryptocurrencies and the space is now going mainstream. As the New York Times reported recently, we’re all crypto people now: “Bitcoin and other cryptocurrencies have gone from curiosity to punchline to viable investment, making them almost impossible to ignore.”
All of this begs the question: in which should you decide to invest? Are cryptos, with their promise of quick profits (or even quicker losses) a better bet than traditional stocks? Read on to find out the advantages and disadvantages of both.
Let’s start off with a basic definition. The entry on Wiki offers quite a clear one: “A cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.” One key word is missing, though: blockchain. Now a blockchain “is a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.”
As mentioned, cryptocurrencies are neither issued nor regulated by any governmental body and are therefore completely different from, say, the digital euro, which has been proposed by the European Central Bank. Cryptocurrencies typically have no inherent value in themselves (much like fiat money), with the exception of stablecoins. A stablecoin is a digital asset that is backed by real physical reserve assets and is, therefore, less volatile.
The popularity of cryptocurrencies skyrocketed during the pandemic, as global lockdowns and social distancing regulations forced people to find alternative means of investing and transacting business. Now that they’ve arguably gone mainstream, many institutional and individual investors have already added at least Bitcoin and Ethereum to their investment portfolios.
As we did with crypto, let’s start off with a basic definition. According to Investopedia, “A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called ‘shares.’”
In other words, if a certain investor buys 15% of a corporation’s stocks, they own 15% of the corporation itself and are entitled to 15% of its profits and assets. Stocks are sold as a means of raising funds for business activities, and limiting liabilities both to the corporation and the shareholders.
Stocks are known to be highly profitable investments. Amazon shares, for example, were worth approximately $6 in 2001; they’re now valued in excess of $3,000—over 503 times their original price.
As with any investment, trading cryptocurrency can be a mixed bag. Below we’ll examine some of their advantages as well as a number of disadvantages.
“Everyone Is Getting Hilariously Rich and You’re Not”—the New York Times ran an article with this provocative title a few years ago and there is (or was) an ounce of truth to it. For those who invested early and big, crypto’s growth has resulted in tremendous gains. More recently, investors who have shifted their attention to altcoins have also made millions from crypto’s boom.
True, there are plenty of listed companies around the world and plenty of ways to buy into them through stocks, but the crypto market offers an extraordinary range of altcoins in which to invest, especially when considering the space is just over a decade old! It seems hard to believe, but, as mentioned above, there are around 18,000 cryptocurrencies currently in existence. If you’re an investor looking to get in on the ground floor, then you have an array of options when it comes to cryptocurrencies.
Unlike traditional stock exchanges such as the NYSE or NASDAQ, investors can trade crypto at any time throughout the day. If you work or keep irregular hours, or merely want to trade outside of regular banking hours, then you can do so with crypto. And as CNBC has reported, “Around-the-clock trading may be closer than many think, says the CEO of an exchange negotiating with the Securities and Exchange Commission to bring 24-hour trading to the U.S. market.”
Gold, anyone? Historically, gold has been used as a safe asset to combat inflation. Since its supply is limited and it’s a tangible commodity, its value tends to hold during periods of high inflation. Bitcoin, as many now know, is often referred to as “digital gold,” which means that many investors see it as a hedge against inflation, which has come to define fiat currencies.
Investors are drawn to goods and services that have the potential for widespread adoption. With so much talk of cryptocurrencies going mainstream (or already having gone mainstream), many investors see a bright future ahead for a range of altcoins and the underlying blockchain technology upon which they are built. After all, major companies that accept crypto as payment include Tesla, Amazon, Microsoft, Sotheby's, and Coca Cola (among many others).
As attractive as cryptocurrencies have become, it's not all good news. Here are some of the downsides to consider before taking the plunge.
Let’s start with the obvious one: volatility. As Coinbase describes, “As a newer asset class, crypto is widely considered to be volatile — with the potential for significant upward and downward movements over shorter time periods.” It’s not uncommon for Bitcoin’s value to drop almost 30% in three days or increase over 300% in a year.
Cryptocurrencies are largely unregulated, which makes them unpredictable. And unpredictability can dissuade investors from investing in a given asset. Currently, crypto is banned in China and at least eight other countries. In the United States, President Biden just announced an executive order, entitled “Ensuring Responsible Development of Digital Assets,” to study digital currencies. Opinions are divided, but a fundamental uncertainty over crypto’s worldwide regulatory future remains. Many investors prefer to sit on the sidelines for the time being.
Buying, selling, and storing cryptocurrencies can be especially difficult for new investors, who may not thoroughly understand the technology and how to interact with it. Lost funds due to mistakes as well as stolen funds due to hacks and phishing are not uncommon, putting many investors off the crypto market until more user-friendly services are developed.
Crypto’s scalability refers to its ability to handle a large number of transactions occurring at the same time. While cryptocurrency transaction speeds are typically quite fast, a large amount of individuals transacting cryptocurrency could cause a delay in the remittance of funds, which would obviously prove to be highly inconvenient for investors.
Stocks have been around for quite some time, making them a more predictable and proven option than the newer, more volatile, and largely unproven crypto market. Here are some of the advantages of trading stocks.
When you invest in stocks, you can rest assured that stock exchanges, brokers, and related companies are all subject to governmental regulations at the hands of a number of agencies. In addition, there are strict reporting requirements, particularly those stipulated by the Securities and Exchange Commission (SEC). That’s not to say that stocks are entirely safe, but they do adhere to a set of regulatory standards absent, at least for the time being, in the crypto space.
If you’re interested in solid returns over a longer period of time, then stocks are a good bet, especially since they have a proven track record of yielding solid investment returns. Though stocks can be volatile in the short term, they have generally been safe to hold over long periods of time, which is why many long-term investors use them as a pillar of their investment portfolios.
Not all stocks are created equal. Although generally far more stable than their volatile crypto cousins, stocks can and do have a wide range of volatility, ranging from the relative stability of large-cap stocks (such as Apple or Amazon) to highly volatile “penny stocks” at the opposite end of the spectrum.
As we all know from painful experience (2007-2008 anyone?), stocks and, by extension, the stock market are far from perfect. Let’s take a look at some of their downsides.
What goes up, must come down. Just because they’re not as risky as crypto doesn’t mean that stocks are inherently safe investments. Stock prices can be quite volatile, making them risky investments subject to the whims of the market, international developments and global politics, or individual company policies.
Let’s just say you’re not going to get rich overnight by investing in Apple stock. While the same case can be made for crypto, which has dipped since all-time highs in November 2021, stock prices tend to rise along a flatter curve, meaning that gains tend to be more moderate (think 10% a the long term versus crypto’s 10% in a day or even a few hours).
If you’ve invested in a publicly traded company, you might not have full access to the company’s details. The obvious implication is that you’re investing in something that you might not understand fully since you’re in possession of all the information. In extreme cases, companies can go dark, effectively putting a blindfold on investors.
As with so many investment scenarios and decisions, the short answer is that it depends. In this case, it depends on your risk tolerance, age, investment goals, and disposable income, among other things.
Both cryptocurrencies and stocks present viable, profitable returns for investors, while both carry certain risks, some of which are specific to each. When devising your investment strategy and portfolio, you don’t have to make an investment decision based on an either-or proposition. In other words, crypto and stocks are not mutually exclusive: you can own crypto while also owning stocks. In fact, owning both is an excellent way to diversify your portfolio.
For those traders who are either skeptical or concerned about crypto’s volatility, you can always test the waters by splitting the difference and choosing a cryptocurrency exchange-traded fund (EFT). As U.S. News & World Report writes, “Exchange-traded funds are some of the easiest ways for investors to gain diversified exposure to a particular theme or asset class. One of the challenges of investing in Bitcoin (BTC) and other cryptocurrencies in the early years of crypto was figuring out exactly how and where to buy them. Cryptocurrency ETFs make it just as easy to invest in Bitcoin as it is to buy popular stocks. There are now several cryptocurrency-themed ETFs out there, and that number continues to grow.”
As recent developments suggest, cryptocurrencies are here to stay. As The Economic Times reported, “The past year has been a significant one for cryptocurrencies and blockchain. In the face of such extremity and economic meltdowns, cryptocurrencies have proved to be remarkably resilient. Fortunately, the rapid increase in accessibility of global high-speed internet and digitization has created a ripe environment for digital currency.”
Cryptocurrencies have also become a lot greener since the early days of Bitcoin’s energy intensive proof-of-work consensus approach. Some, such as Algorand, are even carbon negative, making them an attractive alternative to traditional stocks. And with accessible, easy-to-use exchanges such as Binance and advanced algorithmic trading platforms catering both novice and advanced investors, the future of cryptocurrencies is indeed a very bright one.
So, by all means, continue to invest in stocks as part of a long-term approach to building wealth. But a prudent investor is one that diversifies across different asset classes. If you’re new to crypto investing, then there are many books to get you started.
Whether you invest in stocks, crypto, or a combination of the two, always remember the golden rule: never invest more than you are willing to lose!