Cryptocurrencies and stocks are two popular investment vehicles. The stock market is well-established, heavily regulated, and comparatively stable. Cryptocurrency is a disruptive technology with volatile prices that can bring substantial gains and losses. Which form of investment you prefer will depend on your level of risk tolerance, as well as whether you are looking for a short-term or long-term investment.
Short-term vs long-term investments
Whether you’re investing for the short or long term depends primarily on personal circumstances. Young adults looking to start saving for retirement should concentrate on long-term investments. They can also take more risks with the money they invest. But, as retirement nears, risk levels usually drop and investors look for short-term gains on larger investment pots. A strong investment portfolio may have both short-term and long-term investments.
Cryptocurrency for trading
Cryptocurrency is the new kid on the investment block. It launched in 2009 as a decentralized method of sending peer-to-peer payments. It uses blockchain networks, which rely on other users to validate payments, with the cryptocurrency typically being the reward given to validators, used in the exchange itself, and potentially used as gas to get on and use the network. However, cryptocurrency is now commonly used in trading and there are thousands of cryptocurrency coins with many more being released every year.
Crypto for short-term investors
Although it is a relatively new investment asset, cryptocurrency has caused quite a stir since Bitcoin launched in 2009. It experienced significant gains in 2011, 2013, 2017, and 2020. However, it also followed almost all of these bull runs with significant crashes in 2011, 2014, 2018, and 2022.
And it isn’t just Bitcoin that has seen these price swings. Initial Coin Offerings (ICOs) have proven especially fruitful in the past with some successful coins going on to post 100x or even 1000x profits within the first few weeks of hitting major exchanges like Binance.
New coins launch every month, with keen speculators eying the top potential coins on Binance in the hope of emulating these early successes. Crypto writer Kane Pepi points to the recent example of $ORDI, which rose 292% after it was announced that the coin would be listed on Binance. Keeping an eye on such analyses is a wise thing to do if you want to stay tuned in and score some clever investments in crypto.
Long-term cryptocurrency investment
These digital currencies are often seen as being short-term investments due to the level of volatility in the market. Prices can increase or decrease by 10% in a day, often with even greater swings than these. No other investment offers this kind of potential profit in such a short space of time. However, crypto also has great long-term potential. Bitcoin started 2020 at a price of around $7,000. Four years later it had reached over $70,000.
Long-term holding of cryptocurrencies enables investors to avoid the challenging ups and downs associated with the market while still having the potential to make significant gains.
Crypto is not for the faint-hearted
Whether you are looking for a short-term or long-term investment opportunity, though, cryptocurrency is not a good option for the risk-averse. Many governments, government agencies, and experienced traders not only shy away from this investment class but openly decry it as potentially hazardous.
The UK government has described investing in meme coins, a specific type of cryptocurrency with no utility and that relies on social media backing, as being akin to gambling. Warren Buffett has recently called Bitcoin 'a gambling token', but accepts that some people like to play with their investments in a more challenging way.
Crypto to invest in other asset classes
The crypto market can also offer an alternative means of investing in other assets. Stablecoins, for example, are tied to the value of existing assets. Tether is tied to the value of the dollar while Poundtoken is tied to the value of GBP and Pax Gold is tied to the value of gold. This enables investors to effectively buy small amounts of gold and experience the price movements of the gold market. Or, crypto can be used as an alternative to traditional foreign exchange pairs with typically lower prices and without the need to use forex brokers.
These cryptos, which are closer to regulation by governments and securities commissions than any other class of cryptocurrency, take some of the gamble out of crypto investment.
Long-term stock investment
For the truly risk-averse, stocks represent a better option. Share trading is generally considered a long-term investment plan with many investors opting to hold stock for ten years or more. That doesn’t mean there isn’t potential for big gains during this period, though.
nVidia is something of an outlier, but ten years ago its price was $0.5 and today it is trading at more than $122. In the last five years, Apple has seen its stock rise more than 9,000%, and who’s to say it is going to stop there with every new version of the iPhone and the Macbook generating significant interest in the global market?
Dividend payments
Share price increases aren’t the only potential gains to be made from stocks, either. Target is one of a raft of companies that pays out dividends to its shareholders and it is on a staggering 53-year dividend growth streak and has paid out dividends in every one of around 230 quarters.
Target currently pays out $1.12 per share as a quarterly dividend. Long-term investors can benefit from dividend payouts by growing their investment bank over time, while this consistent level of payouts is also beneficial to the short-term holder.
Crypto vs stocks
Despite the stability of the stock market, cryptocurrency typically outperforms it. Bitcoin has outperformed 6 of the 7 biggest stock gainers over the past five years. Its price of $65,000 appears high and is close to its peak of over $71,000 but many commentators expect it to go on and reach $1 million per BTC.
Diversification
The key to a good investment portfolio is diversification, which means there is room for both cryptocurrency and stocks and shares. Within both classes, there is room for further diversification with short-term and long-term holdings, as well as steady options and those that offer greater potential swings tempered by significant market volatility.
Exchange-traded funds
One way of finding diversification within a portfolio is through the use of Exchange Traded Funds. These funds are made up of multiple shares or other investments that aim to track or, better still, outperform a particular market.
Stock ETFs can follow an entire stock market, such as the S&P 500, while others might invest in specific types of stock. ETFs are managed by fund managers and because they naturally incorporate stocks of different companies, they won’t usually endure the same extreme peaks and troughs that are witnessed when buying shares in a single company.
January 2024 saw the launch of the first Bitcoin ETFs and, in July, Ethereum ETFs followed. Many believe that Solana ETFs are the next to receive SEC approval, and as more and more cryptos get their own funds, the launch of a general cryptocurrency fund also becomes increasingly likely.
What have we learned
Cryptocurrency is volatile but this means it has a lot of potential for making investors money. Stocks, on the other hand, are considered the safer, or less volatile, bet. For the time being, stocks and index funds remain a more convenient option for long-term investments, while crypto coins still appear more appealing for shorter investment periods. A combination of classes can make a diverse portfolio that has the potential for profits in the short term and the future.