Crypto vs. Stocks: Where Should I Invest?

12 Minute Read
Posted by Overflow Team on June 9, 2022

Tags: Investing

Crypto vs. Stocks. In one corner stands Stocks, the reigning heavyweight champion with a storied reputation since 1792. And in the other corner: the young, upstart Crypto, a new player in the game who's been gaining lots of momentum as of late.

*ding ding ding*

Who will be crowned the winner?

Okay, maybe it shouldn't be framed as crypto beating stocks or vice-versa, but rather as a side-by-side of two potential investment options.

The point of comparing and contrasting both is to clear up any misconceptions and break down what a potential investment in either might mean for your personal financial goals.

Like with other investment blogs we've done, we caution against any kind of one-size-fits-all approach, as we don't know your personal playbook. There's no magic formula when it comes to investing, and everyone must determine their own risk tolerance and how much they're willing to dive in. Moreover, we aren't financial advisors, so anything we offer is simply helpful information we've found, not direct advice.

If you're asking "where should I invest?" we won't answer that for you directly. However, we hope this guide can help better inform your decision. Perhaps you end up wanting to invest in one or the other, both, or neither.

Ultimately, it's your call. But before you make the call, consider the following…

Stocks: An Overview

What are stocks?

Stocks are securities that represent the fractional ownership of a company. They're often referred to as equities. If you already understand stocks, feel free to skip this part. If not, here's the basic gist:

Companies have an Initial Public Offering (IPO) to raise money (or capital) for their business. They then list their stock on the stock market, which in the United States is the New York Stock Exchange (NYSE). Much of what drives a stock is how much the company makes (earnings) and public feelings (sentiment) about the stock. When Tesla cars shot up in popularity, it became a "hot" stock, at one point clocking in at $1,222.09 per share. On the flip side, Netflix stock has taken a nearly 70% dive this year after a huge subscriber loss. But in general, stocks aren't fluctuating that much daily.

For many investors, the goal is to hold onto stocks until they appreciate (or go up in value), and sell them when they've reached a higher value. You can also make money off of dividends, "a distribution of cash or stock to a class of shareholders in a company," per Investopedia. Dividends are like little treats you get sprinkled throughout the year as a thank you for owning part of the company.

Basic principles aside, what does stock investing look like? You may have looked at the stock market recently and thought "yikes!" Amid an ongoing war in Ukraine, rising U.S. inflation, and soaring gas prices, the market has taken a tumble this year. The Dow Jones Industrial Average (DJIA), an indicator of the stock market's direction, is down 8.24% in 2022, triggering many to sell shares while they can or avoid buying more stocks.

For millennials and other new investors, this was a rude awakening. The last two years have been an unprecedented time of stock market growth. Because of how hot the market was, young investors could bank on getting great returns for little effort and time spent. Beyond that, it became easier to invest, with video-game-like investing apps like Robinhood or WeBull simplifying the process and luring in newer investors.

Here's how Derek Thompson, veteran writer at The Atlantic, described the young investor craze:

"I remember seeing a viral TikTok with this TikTok investor influencer who said, “Here’s how I make $15,000 a month. Ready? Here we go. When a stock is going up, I buy it. And when a stock is going down, I sell it. That’s it, that’s how I’m going to make $600,000 this year.” Like, yes, that is a sensational strategy for this moment…but when the stock market does what it will inevitably do and starts to come down, that strategy will not work at all."

As Thompson said, the market ebbs and flows, but since its inception, it's trended up and to the right. Over the last 10 years, the stock market rate of return has been around 14%, meaning your $10,000 investment made in 2011 would likely be worth $11,400. That's oversimplifying it, but it illustrates the idea that on average, investors make money over the long haul if they manage their portfolio well. Some even opt to have managers if they don't have the time to dedicate to building an elaborate portfolio management strategy.

The Case for Stocks

From a stocks vs. crypto lens, here's the case for why someone might opt to primarily invest in stocks. On the whole, stocks are less risky. They have a tried-and-true reputation and have been a fixture of the American economy for centuries. It's not the flashy, new option, but for most of the 1900s and 2000s, stocks have been a proven investment vehicle.

As mentioned before, you can get capital gains from stocks that go up in value. You make money by selling stock to other investors for more than you bought it for. Stocks with dividends are also valuable if you decide to hold onto stocks for the long-term. (Most of the time, dividends are paid out in cash.) If you owned 1000 shares of a stock with a $2 annual dividend share, you'd net $2,000 annually. Not bad when you multiply that by 10 years of holding the stock.

Cryptocurrency doesn't currently have dividends. With crypto, you can only gain by selling to another investor. If other investors ultimately don't value crypto in the same way, it'll be harder to sell and ultimately decline in value. On the flip side, stocks are backed by real companies with extra layers of stability. Apple, for instance, might go through some troughs and peaks, but you can bank on the fact that Apple products are ubiquitous and popular, and ultimately the company isn't going anywhere.

Without getting too far in the weeds, there are also more "speculative" ways to make money with stocks, such as options trading. We won't unpack this too much, but it's essentially a contract giving you the right to buy stock shares at a set price on or before a certain date. This can give some flexibility if you're looking to buy shares in bulk, or on the flip side, "hedge" against a company.

The Takeaway: In short, stocks may be old-fashioned, but if you're less inclined to be speculative and have a lower risk tolerance, stocks might be a more consistent bet. But before you write-off crypto, let's take a look at what some potential upsides might be.

Crypto: An Overview

What is cryptocurrency?

Again, feel free to skip this part if you're already savvy in crypto terminology. If not, we'll try to keep this overview brief.

Put simply, crypto is digital money. It's not backed by a bank or government, making it "decentralized" by nature. That doesn't mean people aren't keeping track of transactions, however.

Every transaction is recorded publicly and anonymously using the blockchain, which is just a fancy term for a running list that verifies purchases and sales.

"Imagine a book where you write down everything you spend money on each day,” says Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax, in a recent Forbes article. “Each page is similar to a block, and the entire book, a group of pages, is a blockchain."

This makes crypto relatively safe and also accounts for different transactions, so you can't just make up a sale or falsify a transaction.

Cryptocurrency is inherently based on supply & demand and perceived value. Like gold, cryptocurrencies have a fixed supply, and are only worth something because people think they are.

Some prominent examples of cryptocurrencies are Bitcoin, Ethereum, and Binance Coin. Bitcoin clearly has the shiniest appeal, as it's hovered between roughly $29,000 and $47,000 per coin this year alone. However, the steep price of one coin makes it harder to get into the game, which is why some opt for less expensive options like Binance Coin, which sits at $323.14 per coin as of writing this.

The Case for Crypto

For an investor looking to swing for the fences, cryptocurrency has historically higher returns than stocks. The highest return of the S&P 500, a popular stock market index, was 34.11% in 1995. On the flip side, Bitcoin is up more than 1,000% over the last five years. It should be noted, of course, that said surge has also had periods of steep losses. This year alone, Bitcoin is down around 24%. If you have higher risk tolerance (willingness to take losses for the sake of gaining bigger amounts in the future), then you might not be phased by such erratic swings.

Gains and losses aside, you might be more interested in crypto purely because it isn't tied to a specific country or government. Perhaps you like the fact that cryptocurrency is traded between individuals and isn't susceptible to the rules or policies of a "middle man." Here's an example of why that might be an advantage:

The Russian ruble cratered to just .0007 USD in early March. While it's starting to bounce back, it was directly impacted by what was going on geo-politically and economically in the country. While bitcoin isn't entirely immune from being affected, it doesn't rise and fall according to how a country is doing. No single country "owns" bitcoin, and countries can't really police it outside of banning it outright, like China did.

Though only 27 million Americans own some kind of cryptocurrency right now (less than 10% of the population), many analysts and experts are expecting "mass adoption" of it to surge in the coming years. Remember when the iPhone was released and you thought it was only reserved for the cool, rich kids? Now iPhones are a dime a dozen, and practically everyone you know has one.

Financial forecasters expect crypto to have a similar surge in popularity and usage. According to SoFi, "the total market cap of the cryptocurrency market in 2013 was about $1.6 billion. By June 2021, it rose to over $1.4 trillion." That growth trend is certainly telling.

The Takeaway: As the world goes more and more digital, it doesn't hurt to be ahead of the curve by already having digital holdings. Beyond that, an increasingly uncertain world might look to withdraw their trust from financial institutions and deposit it into a more communal network.
If you worry about social sentiment around crypto swaying wildly and would rather play it safer, perhaps owning crypto isn't for you. Or maybe you'd rather wade in with a more cautious approach, like buying a crypto-based NFT. This is basically a "basket of stocks" with some crypto holdings.

Crypto vs. Stocks: The Core Differences

Now that we've highlighted some of the unique attributes of both, let's take a look at how they differ on a fundamental level.

Where it's held: When you buy stocks, you have to open an account through a brokerage, such as Fidelity or TD Ameritrade. These brokers have access to your personal information but in turn are robust, secure platforms.

For many, the appeal of crypto is that there's a level of anonymity. You don't have to go through a central bank to make purchases or store your holdings. Instead, you can keep your holdings in a digital wallet with a password only you can access. The blockchain technology used in cryptocurrency (think of it like a running list of transactions) gives an extra layer of security. The primary way people can lose money or have their account compromised is if they get lured by a "phishing" scam, in which someone tries to obtain your private password key and clear out your holdings.

Where you buy/sell it: We talked earlier about how you can buy and sell stocks on the New York Stock Exchange, but what about crypto? In the past, it took a series of computers to "mine" bitcoin and other cryptocurrencies. Nowadays, you can go on a cryptocurrency exchange to convert cash into crypto, much like you would if you were exchanging currencies in a foreign country. Interestingly enough, purchasing crypto is becoming more like purchasing stocks, as many brokerages are now offering the ability to buy and sell crypto directly on their platforms.

Volatility: According to Investopedia, volatility is "the amount of uncertainty or risk related to the size of changes in a security's value." In other words, to what degree could it swing up or down in a given amount of time?

While some stocks definitely have bad days, and the stock market has taken some serious L's in its day (Stock Market Crash of 1929, or more recently, the 2008 Recession), the stock market has stood the test of time. Typically stocks only "crash" if there's a huge event that impacts a company's earnings – such as the aforementioned conflict in Ukraine. Moreover, it depends on what type of stock you're investing in. Highly speculative stocks can have some wild swings, whereas holdings like Warren Buffett's Berkshire Hathaway (BRK), have stably gone up.

Cryptocurrency, on the other hand, can be subject to some pendulum swings. Bitcoin, arguably the most popular crypto coin, began the year at around $47,000 for a single bitcoin, but has dipped to $29,239 as of today. That said, it's up 1,047.52% over the past five years. Why the volatility? Using Bitcoin as an example again, it has a set supply and demand – there will be a day when Bitcoin runs out, as there's a hard cap at 21 million coins. It simply has value because people believe it has value. But unlike an oil or steel stock, which represent actual products, cryptocurrency isn't rooted in the material. For some, that's troubling.

In any case, this is a good reminder to have a diversified portfolio so that all your eggs aren't just in one basket.

Who's policing it?: The SEC is the arm of the government responsible for overseeing the stock market. Standing for Securities and Exchange Commission, the agency's mission is to "Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation."

They're basically the refs patrolling the game and making sure everyone is playing by the rules. That doesn't stop bad actors or schemes from happening, but it at least sets the precedent that the stock market is not the Wild, Wild West.

On the flip side, crypto is not regulated by any kind of agency. Many crypto investors love this, as they find freedom and encouragement in the fact that the government doesn't have their fingerprints on it. Government policies, like interest rate hikes or banking regulations, don't have as much of an effect as they would on stocks. Others worry that without enforcement, crypto could be subject to illegal activity due to its pseudonymous nature. Time will tell to see if crypto becomes more regulated, but for right now it isn't.

The Bottom Line

Despite the above differences, both cryptocurrency and stocks are ways of diversifying your financial portfolio and making an investment into something. That in itself should be commended. While not everyone is an investor, there's a reason why most Americans hold 90% of their wealth in non-cash assets: appreciation. If your money is just sitting in a checking account, you'll see meager returns at best.

Similar to how planting seeds in the ground and diligently watering and tending can lead to a plentiful harvest, both of these investment vehicles can unlock greater financial potential and freedom.

Beyond that, both can be great tools of generosity and therefore tax breaks. A huge commonality between them is that they're both subject to capital gains tax if they're liquidated, but are not subjected to the tax if they're donated directly. If you're looking to increase your philanthropy this year, both are viable options to consider.