Vault’s Viewpoint on Crypto vs. Stocks
- Both assets have done well historically, but Bitcoin and Ethereum have outperformed the S&P 500 by a wide margin over the past decade.
- Both assets can be a path to wealth, but crypto requires a higher risk tolerance.
- It’s easier to determine the value of a stock by assessing valuation metrics and financial reports.
- Crypto investors must consider each digital coin’s functionality, volume, and sentiment.
Crypto Exchange Services
Investing in Stocks
The New York Stock Exchange dates back to 1792 and has been a massive wealth generator for many investors. Stocks give you exposure to a company’s financial performance. Corporations that regularly report higher revenue and net income each year tend to deliver outsized returns for their investors.
The Different Types of Stocks
Each stock is either a value stock or a growth stock. Value stocks are profitable corporations with low valuations and competitive advantages. Many value stocks consist of mature companies with higher margins of safety. These stocks are likely to get left behind in a bull market but won’t endure as many losses in bearish economic cycles.
Growth stocks are the opposite. These companies report exceptional revenue growth but may not be profitable. Many growth stocks have lofty valuations since investors have immense expectations for these corporations. If a growth-oriented corporation suddenly reports revenue deceleration or higher net losses than expected, its stock can plummet.
Value stocks are optimal for risk-averse investors, and some of these stocks may even offer quarterly dividends. You will get paid just for holding a dividend stock. Growth stocks are better choices for investors who have higher risk tolerances and lengthier timeframes. If you can wait a decade or more before selling shares, growth stocks may be for you. Investors usually gravitate toward value stocks as they get closer to retirement.
How Do You Invest in Stocks?
Investing in stocks is straightforward. You first have to create a brokerage account with a firm like Vanguard or Fidelity. You will need your ID, social security number, and other information to open an account.
Once you open and fund your account, you can initiate a stock order. Market orders get implemented right away, while limit orders only go through once a stock reaches your designated price point. For each of these orders, you get to input the number of shares you want to buy or sell.
You’ll have to provide a ticker symbol to complete a market order. For instance, if you want to buy Amazon stock, you will have to type “AMZN” since that is Amazon’s ticker symbol. Some brokerage firms let you search for a company’s name and then use the ticker symbol for the order.
Pros and Cons of Investing in Stocks
Pros:
- Stocks allow investors to grow their wealth over time
- It’s easier to analyze a stock’s valuation with metrics like revenue growth, valuation ratios, and other insights
- Some stocks pay quarterly dividends, which act as a source of cash flow
- High liquidity
Cons:
- Returns aren’t guaranteed, and some stocks lose value in the long run
- You have to stay on top of numerous individual stocks to outperform the stock market
- Broader economic conditions and geopolitical tensions can bring down most stocks
Investing in Crypto
Cryptocurrencies don’t have the same history as stocks. Bitcoin led the crypto boom and was founded in January 2009. Ethereum came out in 2013, and a few other cryptos came out in between. Now investors can choose from thousands of cryptocurrencies.
What is Crypto?
Cryptocurrencies are digital currencies that aim to replace fiat currencies. These digital assets are within a blockchain that has decentralized rules. Crypto enthusiasts will point to the fixed supply and the lack of a central authority.
For instance, the Federal Reserve printed trillions of dollars in its response to the pandemic. This money printing resulted in scorching inflation, which elevated the cost of living. Bitcoin won’t have that issue since only 21 million coins are in circulation. A central authority can’t increase the supply of Bitcoin, and similar rules are set for other cryptocurrencies.
Why Is Crypto So Popular?
Some people believe crypto can replace fiat currencies as a medium of exchange. But this utopian idea isn’t the reason why crypto is so popular among the masses.
At the end of the day, people want to make money. Cryptocurrencies have fulfilled that goal better than the stock market. While the S&P 500 is up by 88% over the past five years, Bitcoin has soared by 720% over the same period.
If you put $10,000 into the S&P 500 five years ago, you would have $18,800. That same $10,000 would have turned into $82,000 if you put it into Bitcoin five years ago. Would you like an extra $8,800 or an extra $72,000?
Some crypto investors are pursuing altcoins with smaller market caps in the hopes of realizing higher gains. While some altcoins like Ethereum have large followings and functionality, many altcoins are pump-and-dump schemes. Investing in crypto requires a higher risk tolerance, but investors who are comparing 5-year returns may get drawn into cryptocurrencies.
How Do You Invest in Crypto?
You can set up a brokerage account that lets you buy cryptocurrencies similarly to how you would approach buying and selling stocks. Many brokerage firms like Robinhood make it easy to trade cryptocurrencies. Some of these platforms only offer Bitcoin and Ethereum, while other firms give investors more choices. Bitcoin ETFs have made it even easier to invest in crypto.
But you can own crypto outright instead of having a brokerage firm manage it on your behalf. This route is more complex and requires that you create a digital crypto wallet. You can choose from a hot wallet or a cold wallet. A hot wallet connects to the internet and allows you to buy and sell crypto easily. You can create a hot wallet by opening an account with a wallet app.
Cold wallets are hardware with USB cords. You’ll have to connect the device to your computer to access your crypto and make transactions. Hardware wallets are more secure but require a few extra minutes before you can access your crypto.
Storing crypto in your own wallet creates a significant risk. If you forget the private key, you can’t access your fortunes. While there are several ways to mitigate this risk, such as writing your private keys on a piece of paper, this risk prompts many people to have a brokerage firm manage crypto for them.
Pros and Cons of Investing in Crypto
Pros:
- High potential returns
- Crypto is very liquid
- Several choices for getting exposure to cryptocurrencies
Cons:
- Crypto is highly volatile and requires a high risk tolerance
- You can lose access to your crypto if you lose your wallet’s private key
- It’s difficult to determine the fair value of cryptocurrencies
Should You Invest in Cryptocurrency or Stocks?
Cryptocurrencies and stocks have both done better than high-yield savings accounts. Getting higher returns on your capital can help you achieve your financial goals sooner. While some investors accumulate crypto and stocks, it’s good to know the strengths and weaknesses of these assets. Here are some details to consider when deciding if your next investment should go toward stocks or crypto.
Cash Flow
Stock investors can generate cash flow with dividends and options. Selling covered calls and cash-secured puts is riskier and more time-consuming than buying and holding dividend stocks. While using options to increase cash flow can lead to higher returns, it isn’t for everyone.
Cryptocurrencies do not provide cash flow for investors who buy and hold their digital assets. But you can stake your cryptocurrencies. Staking is similar to taking out a certificate of deposit. You’ll receive interest on your crypto in exchange for locking it up for a set period of time. Crypto staking helps to support the operation of a blockchain.
Historical Returns
Stocks and crypto have both delivered exceptional returns for patient investors. Bitcoin edges out the S&P 500 and the Nasdaq 100 by significant margins. While past returns aren’t an indicator of future successes, Bitcoin has history on its side. Other altcoins have generated higher returns than Bitcoin in recent years, but these coins come with substantial risk and volatility.
Risk Tolerance
Risk-averse investors should stay away from Bitcoin and other cryptocurrencies. Volatility can cause crypto prices to move by more than 20% within a few weeks. Some altcoins can quickly double or triple and lose most of their gains within a few weeks.
The stock market is filled with growth stocks with high volatility, but these investments rarely match Bitcoin’s volatility. You can also choose from stocks with less volatility that have more insulation from macroeconomic headwinds.
Fundamental Analysis
Stock investors have more to work with if they want to analyze their investments. These investors can look at a company’s earnings reports to gauge if it’s growing or starting to slow down. Press releases come with insights from the CEO, CFO, and other leaders that indicate new initiatives.
Stocks also have metrics like P/E ratios, PEG ratios, and other metrics. You can also look at a corporation’s balance sheet to see if it has enough cash to cover current liabilities.
Crypto investors don’t have as many metrics available to them. They can look at a crypto’s trading volume, but most of the analysis derives from a cryptocurrency’s functionality and what people believe it can become. Stock investors can also gauge sentiment for their investments, but they have more resources in their toolboxes to determine if an equity is fairly valued.
Portfolio Diversification
You can diversify stock and crypto portfolios with multiple holdings. Thousands of stocks and cryptocurrencies are readily available. But crypto investors have to wade through pump-and-dump schemes when diversifying beyond popular cryptos like Bitcoin and Ethereum.
Some individual corporations also offer plenty of diversification, which can’t be said about individual cryptocurrencies. For instance, a share of Microsoft stock offers exposure to Azure, Xbox, LinkedIn, Copilot, business software products, Bing advertising, and other revenue streams.
You can get a lot of depth with a single stock. Investors can also buy exchange traded funds (ETFs) that fulfill specific goals, such as income, growth, or a little bit of both. Crypto investors can still spread their capital across many cryptocurrencies, but the returns of most cryptocurrencies are heavily dependent on Bitcoin’s performance. Microsoft stock can lose value without dragging the entire stock market with it.
Frequently Asked Questions
Is Crypto Bigger Than Stocks?
The stock market is bigger than crypto. The total market cap of all publicly traded stocks is $106 trillion. Cryptocurrencies have a combined market cap of $2.5 trillion, which falls short of the stock market. Bitcoin is doing most of the lifting in the crypto markets with its $1.4 trillion market cap.
Will Crypto Ever Replace Cash?
Crypto is unlikely to replace fiat currencies. The government issues fiat currencies, which will generate plenty of demand. Cryptos are a viable alternative for consumers, but they will not replace traditional money. Some people prefer the stability of fiat currencies over the sharp volatility of cryptocurrencies.
Will Crypto Fall If the Stock Market Crashes?
It’s possible but unlikely for cryptocurrencies to withstand a stock market crash. Most cryptocurrencies are based on investors’ sentiment. If the stock market has bad sentiment, some of that can carry over into cryptos. When the stock market had a bad year in 2022, Bitcoin dropped by more than 60%.
