Currently there are two global markets for liquid assets; stocks and cryptocurrency. Each one of these markets offer a completely different multitude of different assets. These assets each fit into an investors portfolio differently and deciding which market to invest in is almost as hard as choosing the individual investments themselves.
Whether to invest in cryptocurrency or stocks is the question and for each investor the answer is different. However a short summary of this article is this: For investors who can handle a ton of risk the cryptocurrency market is a better investment then the stock market.
Here at Chronohistoria I teach people how to generate above normal market returns in their portfolios (alpha). I routinely publish articles on investment research, methodologies, and tips/tricks of the trade so that you the reader are better armed to make sound investment decisions. Feel free to sign up for the free newsletter to remain up to date.
This article goes over the risk and expected return of each investment market (stocks/cryptocurrency). At the end there is a conclusion summarizing everything for those who are in a hurry.
Without wasting any more time let’s jump right into the article: Investing In Cryptocurrency or Stocks: Which Is Better For You?
Expected Risk In the Cryptocurrency Market And Stock Market
Within both the cryptocurrency market and the stock market there is risk. Let’s dive into both the crypto market and stock market to explain how risky each one is.
Risk In The Stock Market
For the average retail investor who only invests in large stable ETFs such as the SPY, VTI, or VT the total risk in their portfolio is minimal. This is because each stock’s price in the stock market is based around the market’s valuation of a company or product.
For example, the stock ticker FB which represents the company Facebook has a very low amount of risk present in the stock. This is because the stock market as a whole values Facebook as a highly valuable company that routinely publishes good earning reports.
With each good earnings report the price of FB’s stock increases. This is because investors in the stock market expect FB to continue to return ever increasing revenue. Simply put, when Facebook becomes more profitable their stock increases.
This is the same macro economic theory for every single stock in the stock market. The price of a stock in theory is tied to the current and future profitability of the respective company.
Further, there are regulatory limitations put in place to protect retail investors’ portfolios. One of the major regulator limitations for risk is the SEC’s use of trading halts. A trading halt is when the SEC puts a halt on all trading activity to prevent mass panic buys/sells. This stops a stock from going parabolic and shooting up or down 200% in a second. (Source for trading halt rules)
Also you can do something called ‘hedging’ each stock investment. Since we can calculate risk in each individual investment we can take out smaller investments that will gain in value as your primary investment falls in value. This will make sure you make money even if you’re wrong! (Here is an article I wrote up on the top 3 ways to hedge your portfolio)
Because each stock’s risk is tied to a company, we can calculate total risk in a stock portfolio.
Now let’s look at the cryptocurrency market.
Risk In The Cryptocurrency Market
The price of an individual cryptocurrency is tied to only one thing, retail investor support. This causes massive problems for risk management in cryptocurrency.
Further, there is no regulatory body that protects retail investors such as the SEC. Because of this cryptocurrencies are free to have insider trading, massive volatile swings/crunches, and overall huge spikes in price. This inherently is not a bad thing. It only means that risk in investing in cryptocurrency is astronomical and unpredictable.
Let’s look at an example of how these two factors impact risk and return on a crypto currency. Below is a graph showing the rise of Cardano over the past 4 years. (Source for Graph CoinMarketCap)
Cardano upon its release 4 years ago was worth $0.026 a coin. Remember there is only one thing that impacts a cryptocurrencies value; the retail investor’s expected future value of the coin. Cardano was not tied to a value of a company unlike a stock in the stock market. Further, there is no regulatory entity such as the SEC regulating the investment.
As such if you invested $10,000 in Cardano upon its release (ICO) then you would have made around $942,000 in four years! However you would have risked 100% of your investment. (I wrote up a research article on Cardano a while back you can see it by clicking here)
Simply put, the risk in the cryptocurrency market for any coin is 100%.
The cryptocurrency market is the wild wild west of the investing world. People are free to perform insider trading, pump and dumps, and trade as much as they want. However, engaging in this market you need to assume you will lose 100% of your investment.
Expected Return In the Cryptocurrency Market And Stock Market
Now this is where things start to get fun.
I am going to go over the expected returns of both the stock market and the cryptocurrency market. This is what an average retail investor can expect to return over a set period of time.
Return In The Stock Market
Much like risk, expected return per year in the stock market can be calculated. This is a good thing because we can predict future cash flows and plan for life events such as marriage, buying a home, having a kid, or retiring.
The average return in the U.S stock market over the past two centuries is 9.25%. That number includes outlier events such as the great depression, flash crash of 1980’s, 2008 recession, and most recently the 2020 pandemic. (Source of 9.25% return)
Above we see a theoretical portfolio where you let $100,000 passively grow at a 7% return per year. After 30 years you will have earned around $757,000 with an annual dividend of about $50,000. That is something you could retire off of.
The reason this is important is because unlike the cryptocurrency market, the stock market offers compounding returns. Since we can calculate the expected yearly return on a portfolio we can position a portfolio for a client that will work for their financial situation in the future.
That is the benefit of returns in the stock market. They are predictable, safe, and most importantly they compound over time. Sure you’re not going to see 10,000% gains in one year. But over time you will be guaranteed to see those huge returns, you will just have to wait 30 years.
The most important thing to remember is that the stock market is a conservative investment option that allows you to compound returns. Over time this compounding return is insane and will create a massive snowball for you to live comfortably. (If your interested I have an entire article on the basics of investing here)
Return In The Cryptocurrency market
This is for the investors who want to throw caution to the wind and make as much money as possible.
In the above image we have a theoretical portfolio (with 100% risk). This portfolio took the top 10 coins based on market cap and weighted them in a portfolio in accordance to market cap. Then we based the growth rate to match the crypto currency market’s overall market cap. The goal here is to create a portfolio that accurately represents the top 10 coins at the given time across 6 years. (Data comes from CoinMarketCap)
The result was staggering. If you had a perfect track record of picking good crypto currencies from the top 10 crypto currencies by market cap you would return an expected 99.31% return per year. Now again this theoretical portfolio has a 100% risk tolerance, which means that in the worst case scenario you will lose 100% of your investment.
However you will not see those returns in the stock market.
Also, you would have to let your portfolio sit there during mass drops in capital. In 2021 alone you would have lost 50% of your portfolio in a matter of months. If you were actively trading this portfolio you would need to have held through this event.
That’s the closest we are going to get to a normal expected return in the cryptocurrency market, 99.31% per year. Remember however this is with a 100% risk built into the portfolio. This type of investing is like going to a casino and betting it all on black multiple times in a row. However for those who have held crypto over the past five years it has paid off.
Cryptocurrency or Stocks: Which One is Better For You?
This is up to each individual investor. I would have to know your individual financial situation and timeline to give you an accurate answer. That being said I have compiled a short pros and cons list to answer the question cryptocurrency or stocks?
You should invest in the stock market instead of the cryptocurrency market if you are any of the following investors.
- A professional and seasoned investor who knows how to manage risk
- A retail investor with a sizable nest egg and wants to retire
- Someone who is risk averse and wants to just grow money for major life events (marriage, retirement, family, etc.)
- You are actively looking to hedge your current investments (real estate, business, etc.)
You should invest in the cryptocurrency market instead of the stock market if you are any of the following investors.
- Someone how does not care about risk
- An investor who wants to maximize potential return
- Understand python programing and can build algorithms to swing trade retail investor volatility
- Someone who can manipulate retail investor sentiment
- An investor who has excess cash they want to gamble with
- Someone who does not want to invest within regulatory guidelines such as the PDT rule
There you have it, an article that goes over investing in cryptocurrency or stocks: which is better for you. Hopefully this article helps to clarify for potential investors which market is a better option for their current financial situation.
I am not advocating any investment decision here. I actually hold both cryptocurrency and stocks in my portfolios. Further, when I invest in the cryptocurrency market I assume that I will lose 100% of my portfolio. This is something that every investor needs to understand if they enter the crypto space.
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Further, you can check out some of our other articles below.
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Until next time, I wish you the best of luck in your investing journey.