Technology and mass innovation are disrupting core institutions in society like the role of money opening it up to competition and scrutiny. Starting with bitcoin, the last 10 years have seen the rise of over 4,000 blockchain-based cryptocurrencies, each with its own unique use. Some seek to disrupt existing industries, while others are made for laughs and memes (e.g., Dogecoin).
Cryptocurrency and Stocks New Money & Old Investments
Cryptocurrencies are blockchain-based, high-risk, volatile investments with the potential for large upsides and downsides. Plus, 95% of cryptocurrencies will not go anywhere as investments, lacking the public awareness to drive hype. It’s the volatility and unpredictability that make cryptocurrencies so risky to invest in.
Crypto investors believe they are early in the adoption cycle and invest based on the possible future payoffs of a coin’s intended use case and the pace of its tech development. Oftentimes, crypto investors expect to go to the moon with 10x or 100x performance unheard of in the stock market.
Closer to Earth, investors seek stocks (shares of ownership in publicly traded firms) based on past performance and future performance expectations to grow their wealth. Stock investing is a tried and true way to build wealth over time. For example, if a person invested $10,000 in the S&P 500 in 2000 and held for 20 years, that $10,000 would be worth almost $50,000 almost 5x the money!
In investing, there’s a tension of short-term profiteering and steady gains that come with long-term holdings. So which should you invest in? Let’s dive in and find out.
Fundamental Difference in Valuation
The main difference between these asset classes stems from how each is valued. Stocks are shares of ownership in real companies that are meant to earn profits. Each company has physical assets (e.g., land, supplies, plant, etc.) that make up its valuation. There are many mathematically-based approaches to valuing a company, creating a more concrete basis to compare and analyze firms. These valuation models are based on research into the long history of the stock market.
Conversely, a cryptocurrency’s valuation depends on each coin. Some are backed by firms or assets, while most are not. Hype and brand awareness drive their valuations. Most tokens are generally rewarded for shipping features and building upon their coin’s functionality. Cryptocurrency valuation is based on speculation on how successfully a coin will meet its intended use case, product development maturity, and coin supply.
For instance, the value of each PAXG coin is backed by one troy ounce of a 400 oz London Gold Delivery bar, and the token’s price follows the spot price of gold. If you own PAXG, you own a portion of the underlying gold held in trust. This token is a way for investors to invest in gold easily. PAXG operates like a gold-backed ETF and provides similar investment into the precious metal.
On the other hand, Bitcoin’s value is driven by the demand for it as it has no intrinsic value backing it. There is no precious metal or profit-producing entity behind it. Instead, investors seek to own bitcoin as a store of value as its limited supply and cryptographic hash record make it desirable to hold onto.
One of the main criticisms of the crypto market is how it is largely driven by speculative hype. Though the stock market is also affected by the same forces, as the meme stock craze of early 2021 illustrates it is to a less obvious extent.
Asset Comparison Crypto vs Stocks
Stocks and cryptos are not made equally. So let’s take a look at the key similarities and differences between cryptocurrencies and stock assets.
When you hold a stock, you own a portion of the company, also known as equity. This share of ownership can entitle you to a dividend if the company offers one and performs well. For instance, if you own 10,000 shares of Apple at a share price of $145 and a dividend yield of 0.62%, then you can expect to make ~$9000 in dividends over the year. A company’s stock moves up or down based on various factors, such as company news, market sentiment, company financials, innovation, etc. It’s the news and sentiment that shape expectations of how a stock will move.
When you buy a cryptocurrency, you are buying some of that currency. Primarily, a currency is intended to be used as a medium of exchange. Payment apps like the Cash App, PayPal, and Venmo now support the buying, selling, and storing common cryptocurrencies, helping them become more accessible. However, they are still too niche and volatile to be used for day-to-day payments.
Instead, investing in crypto is seen as a store of value as hodlers bet on its future adoption and appreciation in value (as reflected in its market cap). Crypto investing is a bet on the future success of a coin, not on its present state. Though the same logic applies to growth stocks too.
Depending on the coin, owning a portion of it may entitle you to participate in its governance. For instance, Ethereum (ETH) is transitioning to a system called Proof-of-Stake (PoS), where a person validates transactions based on how many coins they hold.
In this system, anyone with at least 32 ETH can operate a node that validates transactions. As a reward, these operators will receive newly created ETH for their contributions sort of like a dividend that can be either sold or reinvested.
Stocks are governed by the Securities & Exchange Commission (SEC), a federal agency that oversees and regulates US stock markets. Its mission is to protect investors and maintain fair, secure exchanges.
Cryptocurrencies lack central governance and vary based on each coin. Governance for tokens is delegated among the parties that operate the technology and participate in its use. For example, Bitcoin (BTC) is governed through the consensus of the parties on the network, including miners, developers, and users.
Market Maturity Stock Exchange vs Crypto Exchange
The stock market is more mature than its crypto equivalent. The former is regulated, while the latter has a lighter compliance burden. The most notable regulations on crypto exchanges are for Know Your Customer (KYC) laws, which make exchanges verify the identity of user accounts to prevent money laundering and aid in tax reporting. To sign-up with either a brokerage or crypto exchange, you will have to submit personal data such as your name, address, SSN, and photo ID to comply with KYC laws.
Stocks and other assets must undergo review by the government to list the stock market and publish audited financial statements to maintain them. Additionally, companies must give quarterly financial updates and publicize management meetings. These standards create transparency, set a foundation for market trading, and aid investor decision-making. Thus, the US stock market is widely recognized for its integrity and reliability, with large trade volumes happening each day.
Digital currency exchanges have been around for only a decade and are constant works-in-progress as they strive to reach a mainstream investor audience. Many of their features fall outside of the same laws that govern the stock market. Federal and state governments will likely pass more laws to regulate these exchanges, further legitimizing them. Crypto exchanges are niche as they only offer crypto assets, meaning they have fewer assets and smaller trade volumes.
Stock brokerages track the cost basis of investments and publish yearly tax statements so users can include them in their annual tax filings and pay any owed taxes. Creating these tax statements simplifies the filing process for investors.
Conversely, crypto exchanges offer downloads of transaction histories but do not track the cost basis of investments or produce tax documents. Hence, trading cryptos is less convenient for investors. They either manually track their transactions via spreadsheets or use automated tools like Cointracker.io to streamline the process. As crypto transactions are considered taxable events, this information is necessary to file your taxes. The inconvenience and difficulty of tax reporting is a major pain point of crypto investing.
The stock market operates from 9 AM to 4 PM EST Mon-Fri, excluding major holidays. Crypto exchanges operate 24/7. The overnight movements of the crypto market often fuel investor anxiety as drastic price swings occur, or at least, that’s how I remember it.
Many stock brokerages offer free trading, while cryptocurrency exchanges have fees on all trades. These fees cover the transaction fees on blockchain networks and the costs of running an exchange. Brokerages charge fees on special transactions such as trading a stock listed on an overseas exchange, options trading, and certain violations. Both the stock market and crypto exchanges reward larger investors with lower fees on their trades than those paid by retail traders, creating disparities between both groups.
Cryptos can be bought and sold in fractions, while some brokers have recently adopted this practice with stocks. Fractional share investing makes stock investments more accessible to the general public.
Scams in the crypto world have become so common that the term rug pull has been coined to reflect when a cryptocurrency’s developers abandon their project and steal investor cash. Pump-and-dump schemes commonly occur where private social media groups buy up lots of obscure tokens and then sell them at once, causing many traders to buy the rise and lose out on the dip. There are many other crypto scams as well.
Scams in the stock market would get the perpetrators imprisoned. However, the crypto space does not have equivalent laws governing it or a viable enforcement mechanism, making it a breeding ground for scammers. The stock market still has pump and dump scams and other fraudulent activities. But, they can be identified, and the laws can be enforced, making it safer from fraud than the crypto markets.
I mitigate fraud risk by using well-known exchanges, storing my coins securely, researching the tokens I invest in, and avoiding shady crypto discussions on social media.
All asset classes are subject to up and down price movements based on supply and demand. Stocks and now cryptos are considered the riskiest asset classes. This risk stems from no guarantee of a positive return and price volatility.
According to Crestmont Research, the average volatility for an S&P 500 stock is ~15% and usually falls within a range of 10-20%. The leading crypto, bitcoin, is well-known for its volatility. Bitcoin famously hit an all-time high of $65,000 and fell to $30,000 in a month a 50% drop in value.
Note that other cryptos or altcoins follow bitcoin’s price movements and sometimes exhibit higher volatility, as this chart illustrates.
While Bitcoin lost 50% of its value, the values of Ethereum and Cardano each swung 70%. In fact, during this time, Ethereum hit an all-time high of ~$4,170 per coin. Plus, anyone involved in crypto in the last boom cycle of 2017-2018 can speak to the sense of loss as they saw their holdings plummet (myself included).
Such volatility is uncommon for the stock market, occurring during market crashes or, more commonly, with growth stocks (i.e., Tesla). Ultimately, the differences in stock market and cryptocurrency volatility lie in how each asset class is valued.
Stock price movements are based on news of the company’s and economy’s performance that affects investor expectations of the company’s future. Crypto price movement is spurred by news on a specific token or market or the latest tweet from Elon Musk or another crypto personality. Sometimes the market moves, and no one knows why the same applies to growth stocks.
The rapid, extreme, and seemingly random changes in prices earn blockchain currencies their volatile reputation. As a result, crypto investors use volatility-based trading strategies to make profitable arbitrage trades.
Key Considerations Before Jumping In
Now that you know the main differences between each asset let’s walk through key considerations to consider before you decide to jump into crypto or stocks. For a more in-depth take on investor goal-setting, see our approach here.
Your risk tolerance (how much risk you are willing to take on for potential returns) will vary. Investing in equity indicates a medium to high risk tolerance, and investing in digital currencies indicates a very high risk tolerance.
The more volatility you can stomach, the more risk you can take.
Equities have varying levels of risk. Dividend stock companies are safer and reliably payout stable dividends while growth companies like Tesla, Lucid Motors, or Enphase rise quickly when market conditions are good. For tokens, stablecoins (tied 1:1 with USD reserves) are less risky than Bitcoin. Bitcoin is less risky than altcoins such as Ethereum or Polkadot.
Due to the risk, cryptocurrency is outside of many investors’ risk tolerances, so they will not invest in it. More conservative investors will invest a small portion of their portfolios into growth assets.
To sleep well at night, your portfolio and its investments should reflect your risk tolerance and be built on stable foundations.
The three key tenets of personal finance are:
- risk management
- wealth preservation
- wealth growth
To best manage risk and preserve your wealth, build up a 6-12 month emergency fund, cash savings, and index fund investments before diving into cryptocurrencies. And to safely grow wealth, invest a set portion of your net worth into cryptos to prevent them from having an outsize impact on your portfolio and protect your wealth.
Remember that crypto can plummet 50% on short notice, so it’s better to set a stable foundation and buy into less risky assets before jumping into digital currencies.
Your time horizon depends on how long you are willing to invest in an asset. Long-term investing is typically a few years or longer. With the volatility of cryptocurrency and growth stocks, they are almost impossible to time. Closely tracking stock and crypto prices could cause stress and anxiety that adversely affect your mental health. Investing should never be a stress-inducing activity as it’s a long-term process to build wealth. Life is too short to worry about crazy gambles on cryptocurrency.
Using a long time horizon of at least a few years with aggressive assets will lead to more grounded expectations, especially with cryptocurrencies. Personally, I prefer a time horizon of 3-5 years with my crypto investments and gauge my performance in that time frame. Based on my experiences in 2017-2018, I learned that patience is key to success and diversifying into different assets.
Getting into Cryptocurrencies and Stocks
You can research and buy stocks on full-service brokerages like E*Trade, Fidelity, M1 Finance, etc. Most brokerages offer free trades, while many others offer fractional share investing, making it easier than ever to get started.
Cryptocurrencies are traded on digital asset exchanges such as Coinbase Pro, Kraken, Bittrex, etc. Some exchanges allow you to own your crypto and transfer it off-platform. Others such as Robinhood or Webull allow you to buy and sell cryptos, but you cannot see private keys or send them off the platform.
The Bottom Line Which is Worth It?
Both. With only a few dollars, a person can buy a fraction of a cryptocurrency or a stock but investing in each depends on your goals, risk tolerance, and time horizon. Ultimately, investing in stocks and crypto is placing a bet on future performance. With stocks, you expect the company to grow, increase profits, and see its stock price appreciate. With cryptos, you are betting on the adoption of a novel technology for a specific use case. Thus, the former involves investing based on past performance and public data, while the latter is about betting on future adoption and use cases.
Largely untested cryptos are suited for those seeking short-term profiteering, while the relative safety of stocks offers a better vehicle for long-term wealth generation. If you are early on in your financial journey, it’s better to pay off debt, build savings, and create a foundation for your financial life than potentially losing money in the crypto machine. With crypto, it’s not an exaggeration to say we can all lose our money tomorrow as the market is so new.
As a long-term investor, I hold both stocks and cryptos with a buy-and-hold mindset. However, I take a more limited investing approach to cryptos as I buy and hold “blue-chip” cryptos like Bitcoin and Ethereum and a few others with strong prospects. I only invest in cryptos and stocks with a value proposition I believe in after doing my own research. I’m also mindful of balancing my risky holdings with safer investments in index funds and cash savings so I can come back to Earth safely if my rocket doesn’t make it to the Moon.