In 2020, it didn’t matter what you invested in as long as you got in at the end of March. Stocks, cryptocurrencies, real estate, and even obscure investments like art and wine made great strides after the COVID-induced crash in early March.
Investing has now become a little less automatic. Bitcoin is still up more than 35% year-over-year but is down more than 50% from its 2021 high. The S&P 500 is down 17% over the same period and is currently right around its all-time high, but 2020 big winners like Zoom (NSDQ: ZM), Tesla (NSDQ: TSLA) and Penn National Gaming (NSDQ: PENN) all got big ones Haircuts.
However, investors aren’t concerned about past performance – they want to know which assets will outperform each other in the future. Both stocks and crypto have done well since the pandemic began, but which asset class should investors choose in the future?
Exchange vs. cryptocurrency market
Stocks have been trading for hundreds of years, well before the New York Stock Exchange (NYSE) opened or even the birth of the United States. One of the most talked about financial bubbles was the South Sea Bubble in 1720, when the shares of the infamous South Sea Company quintupled in less than a year before collapsing.
Today’s stock market is a little more resilient than the markets of 1720, but there is still a lot of risk and bubbles are constantly forming. Check out what happened to GameStop (NSDQ: GME) and AMC Theaters (NYSE: AMC) earlier this year. A share is a claim to ownership of a publicly traded company. Companies sell stocks or equity to raise money to run. Stocks can be bought through brokers that facilitate trading between investors and institutions.
The cryptocurrency market is much newer than the stock market. Bitcoin (BTC) originated in 2009 when designer Satoshi Nakamoto sent a small amount of BTC to programmer Hal Finney. Rivals like Litecoin emerged in 2011 and today’s second major cryptocurrency, Ethereum, was launched in 2015.
Risks Associated With Stocks vs. Bitcoin
No asset class is risk-free. Because without risk there is no reward, right? Risks are not to be avoided, but to be measured and tolerated. Your risk tolerance determines a lot when it comes to your portfolio. Here are the biggest stocks versus stocks and bitcoin.
- Systemic risk: When investors talk about systemic risk, they are discussing the risk inherent in the entire market. When the real estate market crashed in 2008, it had a snowball effect on the rest of the financial system as there are so many interconnected parts. Systemic risk cannot be diversified away by buying mutual funds or exchange traded funds (ETFs) or investing in multiple sectors.
- Individual equity risk: Every company has its own risks. Technology companies run the risk of becoming obsolete due to new competitors, financial companies run the risk of accumulating excessive debt, and consumer goods companies are exposed to risks from raw material costs and inflation. Plus, the CEO might turn out to be a creep. Individual stocks are risky because so much can go wrong, which is why advisors recommend diversifying.
- Regulatory / political risk: The government can also throw a screwdriver into the returns on stocks. Perhaps it is on the systemic side that the Federal Reserve is raising interest rates too quickly, or on the individual side, the FDA is announcing a ban on a particular product. But Uncle Sam (and other world governments) can change the rules at any time, which can have a small or large impact on the stock market.
- High transaction fees: Bitcoin is powered by a decentralized network of miners. In order to process a Bitcoin transaction, you have to pay the miners a network fee. This can range from $ 4 to $ 10 depending on the current network load. Bitcoin is expensive to trade – except at Robinhood and Voyager – where you can trade crypto for free.
- Regulatory risk: While stocks are exposed to risks from political errors at the market level or new regulations at the individual level, Bitcoin is faced with far more extreme regulatory burdens. Trading in stocks is never banned, but Bitcoin has already faced raids and bans in various countries around the world, including China, where a large part of Bitcoin is mined.
- Extreme volatility: Some investors won’t consider this a scam, but many simply won’t be able to deal with the constant volatility of the Bitcoin market. Cryptocurrencies are traded around the clock and drawdowns of 50% or more are common. In fact, since its inception in 2009, Bitcoin has had 3 different drawdowns of at least 90%. If the volatility is difficult to deal with, you may have trouble holding Bitcoin.
Benefits of Investing in Bitcoin
Bitcoin is becoming an integral part of many portfolios. Here are some reasons why investors are excited about cryptocurrencies.
- High return opportunities: Stocks tend to take the stairs up and the elevator down. Bitcoin? There are elevators all the way. If you can endure the volatility, Bitcoin can generate huge returns. Cryptocurrency is a brand new asset class and investors still aren’t sure what the future holds for them. That is why volatility is high and when volatility is high so are the potential returns.
- Protection against inflation: If you’re worried that inflation is destroying the US dollar’s purchasing power, a digital currency like BTC could be a way to maintain your purchasing power outside the walls of the US financial system.
- Digital gold: While this is not an entirely accurate description of Bitcoin, it offers many superior properties when compared to gold. While gold has a floor due to its industrial value, it is difficult to trade, expensive to store, and taxed above the capital gains rate. Bitcoin is easy to buy and sell and is taxed at the capital gains rate if held for more than 1 year.
Benefits of investing in stocks
Buying and holding stocks has been a recipe for success for American investors for nearly 100 years. Here are some of the key benefits of investing in stocks.
- Diverse asset class: Stocks span every part of the US economy: from industrial and raw materials companies to service and transportation companies (and everything in between). If you want exposure to banking, technology, international markets – or just a large basket of them – you can build a portfolio that suits your needs.
- Protection against inflation: Gold and Bitcoin hit the headlines as an inflation hedge, but stocks have the longest success rate as an inflation hedge. Since 1950, stock returns have not outstripped inflation in just two decades: 1970-1979 and 2000-2009.
- Cheap to buy: No commissions, low spreads, and minimal management costs are just a few of the benefits you get when investing in stocks. Stocks are now cheaper to buy than bonds, real estate, commodities, and (especially) cryptocurrencies.
- Historical returns: Stocks offer investors stable returns that are measured in decades rather than years. Even Bitcoin, the oldest of today’s cryptocurrencies, cannot boast such a track record. Investing in stocks means investing in human innovation, and that’s not going to go away anytime soon.
Where can you buy bitcoin?
Bitcoin can be bought through certain cryptocurrency exchanges such as Coinbase, Gemini or eToro. You can also buy BTC through stockbroker apps like Robinhood and Webull, or through payment apps like CashApp.
Where can you buy stocks
To buy stocks, you need an account with a brokerage company. You can choose from various institutions for your share purchases. If you want to trade actively, a platform like Robinhood, Interactive Brokers, or TD Ameritrade works well. If you want to buy and hold your stocks, a company like Vanguard or Charles Schwab might be a better fit for your needs. Choose a broker that suits your investment style; there will be no shortage of choice.
Price movements of cryptocurrencies
Cryptocurrency prices can be volatile and trends change at any time. Here are the current prices of the major digital currencies:
So are stocks or bitcoin better?
Are stocks or Bitcoin a better investment? That depends on your investment goals. Long-term thinkers would be wise to have a mix of cryptocurrency and stocks in their portfolio, but the proportions depend on your own risk tolerance. Bitcoin is a volatile new asset that is likely to decline by some 50% in its future. But it also has the potential to skyrocket in a short amount of time. How Much Volatility Can You Take?
When investing for a short-term goal, cryptocurrencies can be too volatile. You don’t want to be forced to withdraw your money during a crippling bitcoin bear market. But if you take a long look, Bitcoin deserves a place in your portfolio. You don’t have to choose one. In fact, a mix of stocks and cryptocurrencies could offer better diversification than stocks and bonds. If your risk tolerance is high, you can make bitcoin a core asset. But if the volatility turns your stomach, just create a small niche for Bitcoin and balance it out as needed.
Benzinga has developed a specific methodology to rank cryptocurrency exchanges and tools. We prioritized platforms based on offers, prices and promotions, customer service, mobile app, user experience and benefits, and security. To see a full breakdown of our methodology, please visit our Cryptocurrency Methodology page.
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