Crypto or Stock: Where Should You Invest in 2022?

Cryptocurrencies have been around since 2009, but it was not until the advent of the COVID-19 pandemic that they started garnering mainstream attention. In the last few years, the total value of crypto assets has grown to more than $2 trillion. Bitcoin BTC/USD, the world's oldest cryptocurrency and the biggest by market capitalization, is valued at nearly $800 billion. 

For a long time, traditional investors shied away from cryptocurrencies, mainly because of the digital assets' volatile nature and the lack of clear regulatory frameworks in the crypto space. 

However, increased regulatory activities by authorities in the world's largest economies, a jump in the value of leading crypto assets, and a growing maturity of the crypto market have made cryptocurrencies viable investment vehicles for retail and institutional investors. By the start of 2022, nearly 10% of all BTC in circulation was held in institutional wallets.

The emergence of decentralized finance (DeFi) protocols and stablecoins, whose values are pegged to fiat currencies such as the dollar, has made the crypto space even more attractive to investors.

The growing acceptance of cryptocurrencies as investment instruments on Main Street has led to more people considering whether or not to diversify their portfolios and include crypto. One question is getting increasingly asked: which is better between crypto and traditional stocks?

This short guide will lay out the pros and cons of both asset classes to help the reader decide what works best for them. Remember, this is not financial advice, and it is best to do your exhaustive research before committing your funds.

Stocks and Cryptocurrencies Explained

Stocks are a type of security that you can buy to gain a fractional ownership interest in a company. This legal ownership stake gives you a claim to a company's assets and cash flow. Investors who buy stocks usually make money through dividend payments and capital appreciation.

Stocks can be broadly categorized into common stock and preferential stocks. Holders of common stocks receive dividends and can vote at shareholder meetings. Preferential stockholders only receive dividends and cannot vote. However, preferential stocks usually receive a higher priority than common stocks. Holders of preferential stocks get their dividends paid before common stockholders, and in the event of bankruptcy or liquidation, they get settlements first.

For those not in the know, cryptocurrencies are cryptographically protected digital assets that can be used as mediums of exchange or stores of value. Cryptocurrencies do not have a central regulatory body and are distributed across an extensive network of computers known as a blockchain. Cryptocurrency ownership is determined by holding a private key used to secure wallets and execute transactions.

Reasons to Go Pro-Crypto

Potential for Higher Returns

 While the crypto market is notoriously volatile, digital assets can potentially yield higher returns than stocks over a shorter period of time. For instance, after being worth less than a dollar during its nascent period, Bitcoin is currently valued at just over $40K and traded at an all-time high of $68,990. Analysts predict that the value of BTC could potentially reach $500,000 by 2030.

Easy to Access

Previously, crypto trading was a fiendish task involving unsecured and unregulated platforms. But advances in the space have made it easier for anyone to get involved. Investors can now use websites such as Coinbase and Binance to buy and sell cryptocurrencies securely.

Huge Variety

Even though Bitcoin and Ethereum ETH/USD dominate the crypto market, there is a wide variety of digital assets. The key is to do thorough research before investing in any coin.

Positive Momentum

The crypto industry is currently enjoying a fair bit of upward momentum stemming from an increased adoption by institutional investors such as Tesla TSLA. Additionally, Bitcoin, the largest digital currency, is now officially accepted as legal tender in countries like El Salvador, with other countries studying the possibility of following suit. Crypto is essentially going mainstream.

Demerits of the Cryptoverse

Volatility

The value of crypto is primarily determined by sentiment rather than physical assets. The fickle nature of emotion means that the price of crypto is constantly going up or down, depending on how people feel. This constant fluctuation may cause new players in the crypto space to lose their funds when they make rash and emotional decisions fueled by the fear of missing out (FOMO).

Security Risks

While crypto exchanges are improving their security systems, there is still a very high risk of losing funds to scammers and hackers. In fact, in the first three months of 2022 alone, crypto investors lost more than $1.2 billion to hackers. And due to the unregulated nature of the industry, there is barely any recourse for those that lose their money.

Long-Term Prospects

Cryptocurrencies generally do not work very well for investors looking to make money in the short term. If anything, the crypto community even invented a term, "HODLing," to urge investors not to sell their crypto assets but keep them for the long term.

Moving Towards the Stock Exchange

Less Volatile, More Accessible

Compared to crypto, stocks usually exhibit far less extreme price fluctuations.

The emergence of retail-friendly platforms such as Robinhood and Fidelity, and products like fractional shares have made it much easier for regular people to invest small sums of money to buy ownership in hugely successful businesses.

Well-Regulated

The stock market is highly regulated and secured by government agencies such as the U.S. Securities and Exchange Commission (SEC). This means that most scams are often nipped in the bud before they affect investors. If a business defaults on its obligations, there are usually mechanisms to protect investors from total losses.

Diversity

The stock market has thousands of individual stocks and index funds for investors to put their money into. These funds represent various industries, ranging from agriculture to manufacturing and everything in-between.

Demerits of Stocks

Volatility

While not as extreme as what can be experienced in the crypto market, stocks still regularly suffer their fair share of price fluctuations, especially in times of war, commodity scarcity, or economic recessions. Such volatility can cause new investors to lose their money through impulse selling.

Lower Returns

Traditional stock markets are usually more conservative and less profitable than the high-risk, high-reward crypto space.

So, Where Should You Invest Your Money?

Both stocks and cryptocurrencies have a place in an investment portfolio. However, not everyone should jump into these types of investments. The right choice depends on your personal goals and your risk appetite.

It is essential to carefully weigh the risks and rewards inherent in these asset classes. Some cryptocurrencies have seen their values blow up in the last few years, but savvy investors need to understand the market before rushing in.

Those investing long-term will find better value in stocks, while those with a higher tolerance for risk can opt for crypto.

Ultimately, the best investment practice is to create a healthy balance between stocks and crypto. Only an individual investor (with input from a professional investment consultant) can decide the right mix after considering all the pros and cons of the two assets and measuring them against what they want to achieve in the long and short term.