Are cryptocurrencies better than stocks?
It’s an investment question that has become increasingly popular over the last year or two: are cryptocurrencies better than stocks? People invest for all kinds of reasons. Some people are looking for a low-risk investment that will build into a nest egg over time. Others want to play the high-risk, high-reward end of the stock market to see how quickly they can grow their initial investment.
Cryptocurrencies have typically favoured investors who are willing to take risks. That’s still the case but it might be less true than it once was, as the concept becomes better understood and the longest-standing currencies begin to find some stability. Here are the pros and cons of cryptocurrency investing, compared with stocks.
One major benefit of cryptocurrencies is that they are open to all. Getting started in stock investing means getting a broker, which often requires a minimum investment and trading only when the stock market is open. Crypto investing, in contrast, requires no minimum, is available 24/7 and, depending on the exchange, can have a very quick start-up time. The cryptocurrency transaction fees are lower than brokerage fees too.
The main appeal of cryptocurrencies is, of course, the promise of big returns. While Netflix stockholders have seen an increase on their investment of more than 1,000 per cent over five years, which is extraordinary, Bitcoin investors have seen growth of more than 22,000 per cent in the same time frame. Those numbers are simply mind-boggling, and though growth has slowed during 2018, Bitcoin investments are still likely to grow at a faster rate than almost any stock.
The mechanics of cryptocurrencies also offers appealing benefits to investors. There is a limit on the total number of Bitcoins that can ever be mined, for example, which increases an element of scarcity that should protect mid-term growth. In contrast, no such scarcity applies to stocks. A company can issue new stock at any time, diluting the holdings of its investors in the process.
As the ecosystem around cryptocurrencies matures, they are become increasingly stable and secure. The extreme volatility of cryptocurrency prices, which rendered them more speculative assets than investments, has shown signs of calming down. Assessing Bitcoin in September, ‘the balance’ concluded: “Variation has decreased to levels more synonymous with traditional currencies.”
That said, the potential for volatility is appealing to some investors. Stock investment requires patience because it can often take years to make significant returns. Some cryptocurrency investors have been attracted by the potential to make big returns very quickly. The downside to this is that it is also possible to lose your investment very quickly.
What’s more, they are unregulated, which brings risks and benefits. We’ll come to the risks in a moment, but the benefits include a global reach and the fact that the networks can’t easily be shut down. Though regulatory action can, and often does, affect cryptocurrency prices, the networks are likely to become increasingly resilient to shocks over time as investors are reassured about their staying power.
The other side of the coin – pardon the pun – is that stock investors are well protected by regulation in ways that cryptocurrency investors are not. Insider trading, for example, where someone capitalises on something they know about a company by virtue of being on the inside, and uses that to gain an unfair advantage, is a crime that is taken very seriously by law enforcement in most jurisdictions.
‘Insiders’ in the cryptocurrency world can come in many forms – they could be major investors, known as ‘whales’, large mining operators or administrators of the cryptocurrency. There is no regulation to prevent them from using their knowledge or ability to manipulate the market to gain an unfair advantage over other investors.
Likewise, if a stockbroker disappears overnight then its customers can often claim insurance. In the US, this covers them for up to $500,000 from the government. Again, this contrasts with the cryptocurrency world where exchanges have been known to vanish, taking their customers’ coins with them.
A stock is also more concrete than an investment. It gives investors ownership of part of the business and its price is backed by company revenue, which in turn is derived by the business’s success in selling products and services. In turn, that ownership gives certain rights and puts upon the business certain responsibilities.
For example, publicly held companies are required to report to investors on a quarterly basis, explaining how the last quarter went and offering their predictions for the next quarter. That gives investors ongoing updates that allow them to decide whether to keep their money in a stock or move it elsewhere.
Furthermore, stock investors have a broad range of stocks to choose from. They can choose different industries, some of which are less volatile than others. And within those industries they can choose to invest in startups – newer, riskier businesses – or in companies that have been successful and profitable for some time and show every sign of staying that way. There are no guarantees, but investors have a much longer history to draw on. In the world of cryptocurrencies, all the players are new, and it is not clear who is going to win. The successful cryptocurrency could be one that barely anyone has heard of yet.
Though we’ve written this as a comparison, it’s worth noting that it isn’t an either/or situation and every investor preaches a diversified portfolio. That means some of your investments should be in low risk areas, while others should lean towards the higher reward. Adding cryptocurrency investment to your portfolio can strengthen it, so long as you plan appropriately.