Investing in Stocks vs. Bitcoin

In 2020, it didn’t matter what you invested in as long as you got in around the end of March. Stocks, cryptocurrencies, real estate, and even obscure investments like art and wine made huge leaps forward following the COVID-induced crash of early March.

Now, investing has gotten a bit less automatic. Bitcoin is still up more than 35% on the year, but down over 50% from its 2021 high. The S&P 500 has returned 17% in the same time frame and currently sits right around its all-time high, but the big winners from 2020 like Zoom (NSDQ: ZM), Tesla (NSDQ: TSLA) and Penn National Gaming (NSDQ: PENN) all received major haircuts.

But investors aren’t concerned about past performance — they want to know which assets will outperform in the future. Stocks and crypto have both done well since the start of the pandemic, but which asset class should investors choose moving forward?

Stock Market vs. Cryptocurrency Market

Stocks have been traded for hundreds of years, far predating the opening of the New York Stock Exchange (NYSE) or even the birth of the United States. One of the most oft-discussed financial bubbles was the South Sea bubble in 1720, where shares of the infamous South Sea Company quintupled in less than 1 year before collapsing.

Today’s stock market is a little more sturdy than the markets of 1720, but plenty of risks still exist and bubbles form all the time. Just look at what happened with GameStop (NSDQ: GME) and AMC Theaters (NYSE: AMC) earlier this year. A share of stock is a claim of ownership of a publicly-traded company. Companies sell stock, or equity, to raise money for operations. Stocks can be purchased through brokers, who facilitate trading between investors and institutions. 

The cryptocurrency market is much newer than the stock market. Bitcoin (BTC) first came into existence in 2009 when designer Satoshi Nakamoto sent a small amount of BTC to programmer Hal Finney. Rivals like Litecoin began appearing in 2011 and today’s 2nd major cryptocurrency Ethereum was launched in 2015.

Risks Associated with Stocks vs. Bitcoin

No asset class is without risks. After all, without risk, there’s no reward, right? Risk isn’t something to be avoided, but measured and tolerated. Your risk tolerance determines a lot when it comes to your portfolio. Here are the biggest stocks facing stocks and Bitcoin.

Stocks:

• Systemic risk: When investors discuss systemic risk, they’re discussing the risk inherent to the entire market. When the housing market collapsed in 2008, it had a snowball effect on the rest of the financial system because there are so many interconnected parts. Systemic risk cannot be diversified away through buying mutual funds or exchange-traded funds (ETFs) or investing in multiple sectors.

• Individual stock risk: Each company has its own set of risks. Companies in the tech sector are at risk of becoming obsolete through new competitors, financial companies are at risk of piling on too much debt, and consumer goods companies face risks from commodity costs and inflation. Plus, the CEO could just turn out to be a creep. Individual stocks are risky because so much can go wrong, which is why advisors recommend diversification.

• Regulatory/policy risk: The government can also throw a wrench into the returns of stocks. Perhaps it's the Federal Reserve raising rates too quickly on the systemic side, or the FDA announcing a ban on a certain product on the individual side. 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.

Bitcoin:

• High transaction fees: Bitcoin is powered by a decentralized network of miners. In order to process a Bitcoin transaction, you'll have to pay the miners a network fee. This can range anywhere from $4-10 depending on the networks current load. Trading Bitcoin is expensive — except on Robinhood and Voyager – where you can trade crypto for free.

• Regulatory risk: While stocks face risk from policy mistakes at the market level or new regulation at the individual level, Bitcoin faces far more extreme regulatory burdens. Trading stocks will never be banned, but Bitcoin has already faced crackdowns and bans from different countries across the globe, including China where a large portion of Bitcoin is mined.

• Extreme volatility: Some investors won’t look at this as a con, but many will simply be unable to handle the constant volatility of the Bitcoin market. Cryptocurrencies trade 24/7 and drawdowns of 50% or more are common. In fact, Bitcoin has had 3 different drawdowns of at least 90% since its inception in 2009. If volatility is tough for you to handle, you may struggle with holding Bitcoin.

Pros of Investing in Bitcoin

Bitcoin is becoming a staple in many portfolios. Here are a few reasons why investors are excited about cryptocurrencies.

• High potential returns: Stocks tend to take the stairs up and the elevator down. Bitcoin? It’s elevators all the way. If you can stomach the volatility, Bitcoin can provide tremendous returns. Cryptocurrency is a brand new asset class and investors still aren’t sure what the future holds for it. That’s why volatility is high and when volatility is high, so are the potential returns.

• Hedge against inflation: If you’re worried about inflation wrecking the purchasing power of the U.S. dollar, a digital currency like BTC could be a way to preserve your purchasing power outside the walls of the U.S. financial system. 

• Digital gold: While this isn’t an entirely accurate description of Bitcoin, it does provide many superior qualities compared to gold. While gold has a floor due to its industrial value, it’s difficult to trade, expensive to store, and taxed above the capital gains rate. Bitcoin is easy to buy and sell and taxed at the capital gains rate if held for longer than 1 year.

Pros of Investing in Stocks

Buying and holding stocks has been a winning formula for American investors for nearly 100 years now. Here are some of the major benefits of investing in stocks.

• Diverse asset class: Stocks encompass all parts of the U.S. economy: from the industrials and materials companies to the service and transportation providers (and everything in-between). If you want exposure to banks, tech, international markets — or just a big basket of all of it — you can build a portfolio that suits your needs.

• Hedge against inflation: Gold and Bitcoin steal headlines as inflation hedges, but stocks have the longest running success rate as an inflation hedge. Since 1950, stock returns have failed to outpace inflation in only 2 decades: 1970-1979 and 2000-2009.

• Cheap to buy: Zero commissions, low spreads and minimal administration costs are some of the perks you get when investing in stocks. Equities are now cheaper to purchase than bonds, real estate, commodities and (especially) cryptocurrency.

• Historical returns: Stocks have been providing investors steady returns that are measured not in years but decades. Even Bitcoin, the oldest of the present day cryptocurrencies, can’t boast a track record like that. Investing in stocks is investing in human innovation and that’s not going away anytime soon.

Where to Buy Bitcoin

Bitcoin can be purchased through specific cryptocurrency exchanges like Coinbase, Gemini or eToro. You can also buy BTC on stock broker apps like Robinhood and Webull, or on payment apps like CashApp.

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Disclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

Where to Buy Stocks

To buy stocks, you’ll need an account with a brokerage firm. You can choose from a number of different institutions for your stock purchases. If you want to trade actively, a platform like Robinhood, Interactive Brokers or TD Ameritrade will work well. If you want to buy and hold your stocks, a firm like Vanguard or Charles Schwab might be better suited for your needs. Pick a broker that fits your style of investing; you won’t have a shortage of choices.

Cryptocurrency Price Movements

Cryptocurrency prices can be volatile and trends change at a moment's notice. Here are current prices of the major digital currencies:

So, are Stocks or Bitcoin Better?

Are stocks or Bitcoin the better investment? It 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 probably still has a few 50% declines in its future. But it also has the potential to skyrocket in a short period of time. How much volatility can you withstand?

If you’re investing for a short-term goal, cryptocurrencies might be too volatile. You don’t want to be forced to withdraw your money during a crippling Bitcoin bear market. But if you have a long view, Bitcoin deserves a spot in your portfolio. You don’t need to choose one over the other. In fact, a mix of stocks and cryptocurrencies might provide better diversification than stocks and bonds. If your risk tolerance is high, you can make Bitcoin a core holding. But if volatility makes your stomach churn, just carve out a little niche for Bitcoin and rebalance as needed.