The investment landscape has been gradually transformed in the last decade. For generations, shares were the investment vehicle of choice when looking to build wealth – but now, cryptocurrencies have burst onto the scene and they are thrilling some investors. But which one is worthy of your hard-earned cash?
That question is keeping millions of investors up at night. Some people believe in the earnest growth potential offered by the stock market, while others chase the explosive returns that crypto can bring. The reality is that both belong in an intelligent investment strategy.
In this guide, we’ll break down everything you need to know about crypto and stocks. You’ll find out about their pluses and minuses, the types of risks they carry, the rewards they can potentially deliver, and most important, how to determine which one will suit your own financial goals. If you’re new to investing or if you just want to add an asset to your portfolio, this article will make things easier for you.
What Is a Stock and How Do Stocks Work?
Stocks are ownership shares of real companies. When you purchase Apple stock, you quite literally own a part of Apple Inc. If the business does well, your stock price rises. If it stumbles, your investment could lose money.
There’s nothing new about the stock market, which originated hundreds of years ago, with the New York Stock Exchange opening in 1792. That lengthy history, in turn, has created a mature, regulated system in which companies and investors must follow strict rules for reporting their finances and business activities.
Key Features of Stock Investing
- Company Ownership: When you buy a stock, you become a part owner of a business that creates real products, services, and revenue.
- Dividend Payments: Lots of major companies pay good dividends, allowing you some income if the stock price moves sideways.
- Regulatory Safeguards: Stock markets are regulated by government agencies, like the SEC, to protect investors and prevent fraudulent activities.
- Professional Analysis: Thousands of analysts follow public companies, their research and opinions are available to everyone.
- Market Hours: Stock markets have specific trading hours during the day, most commonly are 9:30 a.m. to 4:00 p.m. EST.
What Exactly is Cryptocurrency and How Does it Work?
Cryptocurrency is a digital form of money that’s only available online. Unlike regular currencies that are backed by governments, the majority of cryptocurrencies operate on so-called blockchain technology, a decentralized system that acts as a public financial transaction database. This revolution was started by Bitcoin, which appeared in 2009, and thousands of other cryptocurrencies have been and gone since.
Unlike stocks, which can be used to represent ownership stakes in companies, the worth of a cryptocurrency is not tied to its issuer’s balance sheet but to properties such as scarcity, utility and external market demand. Bitcoin is capped at 21 million coins, and some cryptocurrencies are designed to fill specific needs such as executing so-called smart contracts or providing fast payments.
Key Features of Crypto Investing
- 24/7 Trading: You can buy and sell cryptocurrencies anytime, as cryptocurrency markets are open 24 hours a day, seven days a week.
- No Borders: Crypto markets are accessible to anyone with internet.
- High Volatility: Prices can change dramatically in short spans of time and present opportunities and risks.
- Lack of Regulation: The vast majority of crypto markets are not regulated by the government.
- Tech-Forward: A lot of cryptocurrencies are essentially investments in new blockchains and apps.
Risk Levels: Stocks vs Crypto
Stock Market Risks
There are numerous well-documented risks associated with investing in stocks which investors have studied for decades. Market risk impacts all equity shares when economic environment insight and company-specific risks can have an effect on the individual investment.
- Market Waves: Stock prices bounce around on economic headlines, corporate earnings and investor moods. However, stock portfolios become diversified and historically recover from downward cycles in time.
- Company Risk: Companies can go broke and run their stock values to zero. This is why especially getting exposure to multiple companies and multiple sectors is important.
- Risk of Inflation: Inflation can erode your real returns, especially if companies are unable to raise prices to match inflation.
- Economic Cycles: Stocks generally falter in recessions and during economic slowdowns and gain ground during expansions.
Cryptocurrency Risks
Crypto investing encounters all the risks of stocks, and then some, some of which are specific to this asset class.
- Wild Swings: Cryptocurrency prices can change by 50 percent or more in a week, and then change right back. That volatility means crypto isn’t appropriate for near-term financial goals.
- Regulatory Uncertainty: Various administrations around the world are yet to come up with ways to regulate cryptocurrencies. Pushing new laws through could do wonders to some form of crypto values.
- Technology Risk: Cryptocurrencies are based on complex technology which, in the event of malfunction, contains bugs, errors or defunct code.
- Market Manipulation: In smaller crypto markets, it is easier to pump the prices if you hold a share of these assets (e.g. groups of holdings).
- Security of Exchange: Cryptocurrency exchanges are subject to hacking attacks which may result in the drain of investment entirely.
Potential Returns: Historical Performance Comparison
Stock Market Returns
The stock market has provided a reliable, if not average, return on investment over the long term, making it integral to retirement planning and wealth building for countless Americans. The S&P 500, which follows 500 large United States companies, has garnered about 10 percent of annual returns for the last 90 years, including dividends.
| Time Frame | S&P 500 Average Annual Return |
|---|---|
| 10 years (2014-2023) | 12.3% |
| 20 years (2004-2023) | 9.7% |
| 30 years (1994-2023) | 10.5% |
Those returns encompass both good years and bad years, and are a testament to the power of long-term investing. Even amidst the worst crashes, such as in 2008 or the recent 2020 crash, investors who kept a cool head (read: didn’t panic sell) eventually saw their portfolios recover and continue to grow.
Cryptocurrency Returns
Cryptocurrency gains have been more extreme, but also more erratic. Bitcoin, the oldest of the cryptocurrencies, has generated eye-popping gains — and drops — over its life span.
Unlike some of the world’s fiercest speculators, if you invested in Bitcoin at the right time, you could have made out like a bandit. Someone who bought in late 2017 near $20,000 was forced to wait until 2020 to recoup losses, whereas someone who bought in early 2017 still enjoyed attractive gains despite the rough ride.
| Year | Bitcoin Price Milestones | Approximate Return from Previous Year |
|---|---|---|
| 2011 | $1 | N/A |
| 2013 | $1,000 | 1,000% |
| 2017 | $20,000 | 2,000% |
| 2021 | $69,000 | 245% |
Other cryptocurrencies have experienced even larger price jumps, rising by thousands of percent in a few months, and others have lost more than 90 percent of their value.
Short-term Versus Long-term Investment Time Horizons
Best Timeframes for Stock Investing
Stocks are best for people who are investing for the long term and can withstand market cycles. Over the course of history, these longer holding periods cut the odds of losing money in stocks to a small fraction of what they have been in any year.
- Short Term (1-3 years): In the short term, stocks may be dangerous because they experience erratic fluctuations. You could, of course, sell at a loss if you need the money during a market dip.
- Medium-term (3-10 years): Stocks tend to do well over these periods, but your timing might still be bad.
- Long-term (10+ years): This is stock-country territory. The longer you hold, the more likely you are to see a positive return that exceeds the rate of inflation.
Best Timeframes for Crypto Investing
You need to think your timeframes when you are investing in cryptocurrency, things are way too volatile.
- In the short run (days to months): This is gambling, not investing. Cryptocurrency prices can fluctuate on the news, reports, tweets or the market sentiment.
- Medium-term (1–3 years): Crypto can be a play for medium-term investors, but you need to be ready for major volatility and the risk of loss.
- Long-term (3+ years): Long-term investors in crypto have generally been rewarded, but this asset class is still so young that there’s no guarantee this trend will continue.
Diversification Is King For Both Asset Classes
Building a Balanced Stock Portfolio
Investing intelligently in stocks means spreading risk — across a variety of companies, industries, and geographic regions. That diversification will protect your portfolio when certain sectors get hammered.
- Index Funds: These funds spread your investment across hundreds or even thousands of stocks for you. This is a great option for beginners.
- Diversification of sectors: Invest in a range of industries such as technology, health care, financial services and consumer products.
- Geographic diversification: A mix of stocks from different countries can diminish some of the country-specific risks.
- Size Variety: Combine big old companies and small young ones.
Crypto Portfolio Diversification
Diversification is tougher to come by when it comes to cryptocurrency, as coins tend to move in lockstep, but it’s still necessary.
- Major Cryptocurrencies: Begin with the larger, more established coins, Bitcoin and Ethereum, which boast longer track records.
- Various Use Cases: Think of currencies that have different use cases as payments, smart contracts or privacy.
- Market Cap Diversity: Blend established, large cap coins with smaller, possibly more higher-growth opportunities.
- DeFi and Web3: Discover tokens linked to decentralized finance and web3s.
Tax Consequences: What You Should Know
Stock Market Taxation
Investments in stock are awarded a beneficial tax treatment that incentivizes long-term investment.
- Capital Gains Tax: If the stocks you’re selling are held more than a year, the profit is subject to long-term capital gains rates, which are generally lower than ordinary income tax rates.
- Dividend Tax: Stock investments pay dividends and the qualified dividends received from stocks are taxed at same favorable rates as long-term capital gains.
- Tax-Deferred Accounts: IRAs and 401(k)s provide a tax-deferred way to invest in stocks, letting investments grow untaxed until retired.
Cryptocurrency Taxation
Taxes on crypto are harder and usually worse than on stocks.
- Every Crypto Transaction Is Taxable: Unlike trading shares, every transaction can result in a taxable event (sell for fiat, trade for another cryptocurrency).
- Short-Term Rates: The vast majority of crypto gains are reported to the I.R.S. as short-term capital gains, subject to regular income tax rates instead of lower long-term rates.
- Record Keeping: You need to keep track of the cost basis and sale price of every crypto trade, which can be a challenge with frequent trading.
How to Get Started: Tips for New Investors
Starting Your Stock Investment Journey
Entering the stock market doesn’t have to be a complex process, or a luxurious one that requires a finance degree or thousands of dollars.
- Pick a Broker: Find a popular online brokerage that provides commission-free stock trades and educational material. Find platforms that also offer research and market analysis.
- Start Small: Begin with index funds that will automatically spread your investment over many stocks. In many instances, you can get started with as little as $100.
- Automate Your Investments: Establish a monthly automatic investment and leverage dollar-cost averaging, a way to help work out market volatility over time.
- Know More: Read credible financial news outlets, or perhaps try a free online course on investing basics.
Starting Your Crypto Investment Journey
However, venturing into the cryptoverse demands some more skills and security consciousness.
- Research Exchanges: You can buy bitcoins from many exchanges by comparing cryptocurrency exchanges with good customer support and strong security measures.
- Start With the Major Coins: Don’t break eggs in your first run, when it comes to cryptocurrency trading, you should start off with high-quality large cap cryptocurrencies like Bitcoin and Ethereum, you can move to penny cryptocurrencies later.
- Security First: Understand how cryptocurrency wallets work and maybe it’s worth putting more than a couple thousand dollars of it in hardware wallets instead of on the exchanges.
- Only Invest What You Can Afford to Lose: Because crypto is so volatile, never invest money you need for essential expenses.
Portfolio Allocation: The Right Mix to Find
Conservative Approach (Lower Risk)
For a conservative investor, one such allocation could look like:
- 70% Stocks (Majority Index funds and well established companies)
- 25% Bonds and fixed income
- 5% Crypto (Bitcoin and Ethereum only)
It’s a capital preservation play that also gets you some exposure to the growth in crypto.
Moderate Approach (Balanced Risk)
For a moderate investor looking for balanced growth:
- 60% Stocks (Index funds and individual stocks)
- 20% Bonds
- 15% Crypto (various allocation to major coins)
- 5% Alternative investments
That allocation gives more exposure to crypto, but gives a conservative base to save for later.
Aggressive Approach (Higher Risk)
Aggressive investors willing to accept the volatility might choose from:
- 50% Stocks (growth stocks and international)
- 10% Bonds
- 30% Crypto (A diversified Portfolio of DeFi tokens)
- 10% Other high-growth investments
This method will maximize your growth potential here, however, it will require a good deal of emotional discipline during bear markets.
So How Do You Decide? Key Factors to Think About
Your Financial Situation
It’s no surprise that the specific situation of your finances plays a big role in what you should invest in.
- Emergency Fund: Have 3-6 months’ worth of expenses saved in a high yield savings account before you invest in either stocks or crypto.
- Debt Management: Eliminate high-interest debt before investing; investing’s risk-adjusted return is often less than that of the guaranteed improvement provided by debt reduction.
- Income Stability: If your income is not stable, focus more on stable investments, such as diversified stock index funds.
Risk Tolerance and Age
The level of risk with which you are comfortable and the length of time you plan on investing will determine whether the buying and selling time is appropriate for your asset allocation.
- Young Investors (20s-30s): Generally can (and probably should) tolerate more risk and volatility because they have decades to make up short-term losses.
- Investors in Their 40s and 50s: Balance potential growth with growing need for stability as retirement draws closer.
- Senior Investors (60+): Usually requires more conservative strategies which prioritize income and capital preservation.
Investment Goals
Different goals require different investment strategies.
- Retirement Savings: You can’t beat long-term stock market investing via tax-advantaged accounts.
- Short-term Goals: Don’t invest in either stocks or crypto for money needed in 2-3 years.
- Wealth Building: A combination of stocks and a small allocation of crypto can deliver stability and the potential for growth.
Common Mistakes to Avoid
Stock Market Mistakes
- Panic Selling: When you sell stocks off in a market decline you’re locking in losses and missing the opportunity of the recovery.
- Trying to Time the Market: It’s hard to predict short-term market movements and it’s generally a strategy that results in lackluster returns.
- Failure to Diversify: Investing too much into any one stock adds risk that’s not warranted.
- Not Looking at Fees: High-fee investments can eat away at long-term returns.
Cryptocurrency Mistakes
- FOMO Investing: Acquiring cryptocurrencies at the top prices through fear of missing out usually ends in losses.
- Overinvesting: Investing too much in crypto can put your financial security at risk.
- Security Neglect: Failing to secure your investment properly could lead to you losing everything.
- Hunting for Quick Returns: Trading between numerous cryptocurrencies is also typically a bad strategy, as it leads to lackluster overall returns.
The Future Outlook
Stock Market Evolution
The stock market is ever-changing with technological innovations and evolving tastes of investors. ESG (for environmental, social and governance) investing is on the rise, and technology has only tightened charges for trading and ease of access.
Artificial intelligence and machine learning are reconfiguring how companies work and how investors evaluate them. But the basics of stock investing — owning shares in profitable companies — have not changed.
Cryptocurrency Development
Progress in cryptocurrency technology moves fast, with things such as decentralized finance, non-fungible tokens and central bank digital currencies all possibly transforming finance as we know it.
Regulatory clarity is crystallizing albeit at a snail’s pace, and this could help to dampen, if not reduce, uncertainty and volatility present in the recently very dynamic crypto markets. The fact that banks and big corporations are starting to accept crypto could mean that this is going in the direction of being more common.
Final Recommendations
Stocks and cryptocurrencies can both be important parts of a well-prepared investment portfolio. It just matters that you know your situation, and allocate accordingly.
For the vast majority of investors, a diverse stock portfolio should be the basis of long-term wealth creation. When it comes to longer time horizons, stocks provide the ideal combination of opportunity for growth, income and risk control.
Crypto can be a good investing vehicle too since it offers a few unique advantages over investing in traditional stocks and other assets. However, it should generally make up a smaller percentage of your total investments. How much you should put in stocks will depend on your risk tolerance, age and financial goals.
Always keep in mind, investing is a long-term sport; it requires patience, discipline – and lifelong learning. Markets always fluctuate, there will always be downturns and recoveries, but history proves that patient, diversified investors are able to accumulate wealth over time.
Start with broad-based index funds for your stock allocation and the major cryptocurrencies — Bitcoin and Ethereum — for crypto exposure. And as you become more experienced and knowledgeable, you can slowly start to dip into more specialized investments in each asset class.
The most critical thing is to get started as an investor regularly, and to do so consistently, no matter how you choose to begin. Time in the market is usually better than timing the market, and the advantages of compound returns tend to be most evident when they are allowed to run for years or even decades.
Frequently Asked Questions
Q: How should novices split their investments between crypto and stocks?
A: Most of them advise you to begin with no more than 80-90% in stocks (mostly index funds) and up to 5-10% in cryptocurrency. This offers some room for growth while capping potential losses from the volatility of crypto.
Q: Is it possible to lose all your money investing in stocks and crypto?
A: They both have risks, but you’re much more likely to lose everything with individual stocks or cryptocurrencies than with diversified portfolios. Broad-market index funds have never been taken to zero, as much as they can temporarily lose a lot in value.
Q: What is better to save for retirement?
A: Stocks have a longer history of being used to save for retirement and have tax advantages in things like 401(k)s and IRAs. Crypto can play a small part but it definitely should not be your main retirement plan.
Q: How often should I be checking my investments?
A: Monthly or quarterly is fine for long-term investors. Daily observation typically results in emotional decisions that damage returns. Set up automatic investments, then go look at your strategy every so often, not all the time.
Q: Is it better to buy individual stocks or just use indexing?
A: For newbies to the market, starting with index funds for immediate diversification and less risk is suggested. Picking stocks one by one involves a lot of work and greater potential losses.
Q: Has the moment to invest in cryptocurrency passed?
A: Crypto probably won’t have another one of those rocket-ship rides in the early days, but it may still have some potential as the technology is built out and adopted more widely. Volatility is still high, however, so invest only as much as you can afford to lose.
Q: What is the smallest amount that you can start investing?
A: A growing list of brokerages now allow commission-free trading with no minimum balance. You can get started investing in stocks or exchange-traded funds with just $1. Low minimums exchanges usually have low minimums, like $10-25.
Q: How does taxation work with investment sales?
A: You pay the capital gains rate if you have held investments for more than one year. Crypto transactions are taxed as ordinary income if they are held less than a year. Be sure to document your purchases and sales for tax purposes.
