Stocks vs. Cryptocurrency – the better investment

 

The rapid growth of cryptocurrencies as a viable means of investment has put the spotlight on how it compares to traditional or more established investment avenues. It is widely known that equities are a major source of wealth creation for many; over the decades, the highs and lows of the stock market have led to the creation of new billionaires or paupers respectively. However, is it foreseeable that investing in digital currencies will become the preferred investment course in the next few years? Or are stock investments here to stay, especially with the burgeoning global equity market? We will discuss a few factors which may influence the decision of an investor going forward.

Risk Tolerance

risk of profit

Stock market indices display volatility and the price of a stock may be dependent on multiple factors – in some cases, a negative news headline is sufficient for the price to plummet! However, medium- and long-term investors perform research on companies prior to picking up shares, and based on company history, performance ratios etc., a reasonable price estimate can be made. Cryptocurrencies are comparatively much newer and hence, it is much harder to predict whether a particular crypto is a safe investment over a certain period. Also, with user acceptability being a critical factor in a crypto’s growth, the volatility of digital currency prices is much higher. Hence, it comes down to an investor’s risk appetite when deciding between these two investment options.

Market Regulation

market Regulation

The decentralized nature of digital currencies means it is difficult to regulate crypto trading efficiently and this makes it susceptible to fraud and rigging. Anyone can develop a blockchain and launch a digital currency and the increase in ICOs (Initial Coin Offerings) recently is a testament to this fact. However, this can give rise to potential scams as very little due diligence takes place prior to a digital coin launch. In contrast, equities markets are widely regulated by government agencies and companies are subject to regular audits, thus decreasing the likelihood of a share going “bust”. The security cover provided by regulation is a significant feature for the attractiveness of an investment, especially when the stakes are high for an investor.

Transaction Fees

what is transaction fee

An essential feature of the stock market is the brokerage fees charged for every buy or sell transaction. Since all stocks are mostly held in a dematerialized form, a “demat” account is required to be set up for holding and transacting stocks. This may be advantageous for the investor for large transactions, however for smaller contracts, it will become expensive going forward. In crypto markets, there is also a cost incurred while buying and transferring digital assets – however, newer cryptos are attempting to introduce updates to reduce expenses (e.g., the Cardano blockchain is looking to rectify Ethereum’s shortcomings) and there is every possibility that crypto trading will become comparatively cheaper to stock trading in the long run.

The Next Winner

winner

While equity investment provides opportunities to invest in the shares of multiple industries, e.g., banking, retail, healthcare, commodities etc., the underlying asset of cryptocurrencies is technology. Technology is ever – evolving and hence, each newly developed cryptocurrency tries to introduce some technology feature which adds to its potential and increases the chances of it being “the next big thing”. Comparatively, stock research does tend to reveal “hidden gems”, however they are few and far between due to the rigid processes required to be followed prior to Initial Public Offerings (IPOs). Thus, due to the sheer scale of technological advances being implemented in cryptos in recent years, there is a higher likelihood of unearthing the next Bitcoin than there is of discovering the next Google!

Ownership Rights

Ownership Rights

There is a fundamental difference between buying shares and cryptocurrencies. Stocks provide ownership rights, and hence, a share purchase signifies a stake in the ownership of the company depending on the share percentage allocated. Investing in cryptocurrencies means transacting in the tokens of existing crypto blockchains e.g., BTC and ETH for Bitcoin and Ethereum respectively. This does not represent a stake in the organizations which have issued these digital currencies. While this may not be a major drawback during uneventful times, there is unlikely to be any legal recourse in case of crypto trading disputes with the crypto issuer not liable to provide any compensation for the crypto holder. This may be off-putting for investors who wish to incorporate security and legal trust in their investments.

The Last Word

next big crypto

There is no doubt that trading and investing in cryptocurrencies is exciting and has great potential with a steadily increasing customer base. However, as discussed, investing in stocks is preferable and currently, it is considered the better investment of the two. Whether the status quo persists remains to be seen, especially with the way the digital currency market is growing in leaps and bounds. I would recommend investing in a “multibagger” stock now as there will be more opportunities to put your money in the next big crypto in the future!