Cryptocurrency Purchase: An Investment Or Just Another Expense?

Cryptocurrencies have generated massive interest from investors in recent years, with Bitcoin being the most widely used. People invest in cryptocurrencies because they hope its value will rise, netting them a profit. However, it's important to note that cryptocurrencies are highly volatile and lack regulation, making them a risky investment. They are also subject to tax consequences and legal considerations. As such, it's crucial for investors to understand the risks and do their research before buying cryptocurrencies.

Cryptocurrency vs stocks

Cryptocurrencies and stocks are very different financial instruments. Stocks are shares of ownership in publicly traded companies, while cryptocurrencies are digital tokens representing the value of decentralized digital networks. Stocks are traded on heavely regulated stock exchanges, while cryptocurrencies are mostly traded on unregulated exchanges.

Stocks have consistently delivered returns to investors over the last 30 years, with the S&P 500 index returning about 10% annually since 1926. Cryptocurrencies, on the other hand, are highly volatile and subject to speculation. Their value is primarily driven by supply and demand.

One of the main advantages of stocks is that they represent ownership of an actual business, and investors can base their decisions on business results, cash reserves, growth prospects, and more. Cryptocurrencies, on the other hand, are not backed by any hard assets or earnings, and their value is determined solely by market demand.

Another key difference is the level of regulation. Stocks are heavily regulated, and companies are required to provide transparency to shareholders. In contrast, the cryptocurrency market lacks a clear regulatory framework, which makes many investors hesitant to enter this market.

When it comes to safety, both stocks and cryptocurrencies come with risks. Stocks are backed by a company's assets and have a long history of solid returns, while cryptocurrencies offer the potential for substantial gains but are highly volatile and lack the backing of tangible assets.

In summary, stocks are generally considered safer than cryptocurrencies due to their intrinsic value and long-term track record. Cryptocurrencies, however, offer the potential for higher returns but come with significant risks and volatility.

Crypto pros and cons

Pros

• Cryptocurrencies are decentralized, meaning they are not controlled by central banks or governments, and are theoretically immune to government interference or manipulation.
• They can be used to make cheaper and faster money transfers.
• They can be used to generate returns.
• They can be used to streamline remittances.
• They can be used to run smart contracts that automatically execute after specific conditions are met.
• They have the potential for outsized gains.
• There is a growing number of coins to choose from.
• There is a growing interest in cryptocurrencies from investors, companies, and governments.

Cons

• Cryptocurrencies are extremely volatile.
• They pose cybersecurity risks.
• They have no intrinsic value.
• They face regulatory risks.
• They are used in criminal activities.
• They are highly energy-intensive.
• They are susceptible to market manipulation.
• They are difficult to understand for new users.
• They are not widely accepted as a form of payment.

Crypto vs stocks governance

Crypto vs Stocks: Governance

The stock market is a highly regulated space with a long history. It has well-defined rules for trading, owning, and managing investments, as well as a comprehensive taxation framework. On the other hand, the cryptocurrency market lacks a regulatory framework, and its future regulation is uncertain. The US government is in the early stages of determining how crypto should be regulated.

Some key questions that need to be addressed include:

• Should cryptocurrencies be subject to the same rules as the stock market?
• Are cryptocurrencies more similar to fiat currencies, like the US dollar or the euro?
• Or do cryptocurrencies need a completely new rulebook, especially considering that different digital coins are built on distinct technology platforms and have varying long-term goals?

The regulatory uncertainty around cryptocurrencies is a significant concern for many investors, who will not enter the market until clear rules are established. This lack of regulation also adds an uncomfortable level of risk to crypto investments.

While the stock market has clear stakeholder structures for investor recourse and governance systems to protect investor interests, cryptocurrencies have largely been exempt from similar oversight. This has resulted in governance issues, such as the 2016 hack of the Decentralized Autonomous Organization (DAO), which lost $55 million worth of ether due to security vulnerabilities.

Cryptocurrencies, especially the smaller ones, are not currently systemically important enough to warrant the implementation of governance systems. However, as the value of cryptocurrencies increases, the need for regulatory oversight may become more pressing.

In summary, the stock market has a well-established regulatory framework that provides investor protection, while the cryptocurrency market lacks clear regulations, creating an uncertain and risky environment for investors.

Trading crypto vs stocks

Trading Crypto vs. Stocks

The basic experience of buying cryptocurrencies is not very different from buying stocks. You open an account with a crypto brokerage, transfer money to that account, pick a cryptocurrency, and place an order with the brokerage. However, there are some differences to note:

• Crypto brokers typically charge trading fees for each transaction, whereas most stock brokers ended this practice in 2018 and 2019.
• Stock transactions are faster than crypto trades, which need to be approved and verified by the digital currency's blockchain network.
• Stock brokers act as the custodian of stock-based holdings, whereas some crypto investors opt to remove their digital coins from the centrally managed brokerage platform and store them in a cold wallet in their own possession.

History: Stocks and stock exchanges have a long history, with the first stock exchange, the Amsterdam Stock Exchange, set up in 1611. Crypto, on the other hand, has been around since 2009.

Price Volatility: Crypto is generally considered more volatile than stocks due to the uncertainty about its future value and the fact that it often lacks backing by physical assets. However, even less volatile investments like stocks can experience unexpected periods of volatility.

Regulation: Most stock markets are subject to governmental oversight and protection by administrative bodies like the Securities and Exchange Commission (SEC) in the US. In contrast, the crypto market is largely unregulated and prides itself on its decentralized nature. Governments are still figuring out how to align cryptocurrencies with their financial systems.

Scams and Security Risks: The rapid growth and unregulated nature of the cryptocurrency market make it a hotbed for scams. Stocks are also susceptible to scams, such as the pump and dump scheme.

Diversification: Stocks offer a wider range of options for diversification, allowing investors to select from companies in various sectors and countries worldwide. While there are many types of cryptocurrencies and crypto assets, there are fewer options to diversify one's portfolio.

Underlying Assets: Stocks represent ownership shares in a company, giving shareholders a claim on the assets and cash flow of the business. Cryptocurrencies are digital or virtual currencies backed by the technology and network they're built on, not by physical commodities or corporations.

When deciding whether to invest in crypto or stocks, consider your risk tolerance, how much you can afford to lose, your expected returns, and your investment timeline. Adding crypto to a stock portfolio can provide valuable diversification and the potential for lucrative returns, but it's important to understand the risks and volatility associated with both options.

Crypto as a good investment?

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. It gets its name from the cryptographic techniques that let people spend them securely without the need for a central government or bank. Bitcoin, the most well-known and widely used cryptocurrency, was created as a form of payment that isn't controlled or distributed by a central bank.

Crypto has been described as a good investment for those who enjoy speculating and can financially tolerate losing everything invested. However, it may not be a wise investment for those seeking to grow their retirement portfolio or for long-term savings.

Pros

• Possible hedge against fiat currency: Cryptocurrency is not controlled by central banks or governments, so it can protect against inflation in fiat currencies.
• Potential for outsized gains: Cryptocurrency prices can skyrocket, leading to large gains for investors.
• Growing number of coins: There are now thousands of cryptocurrencies to choose from, with new coins introduced regularly.
• Wide interest: Cryptocurrency is gaining interest from investors, companies, and governments. For example, Tesla holds Bitcoin on its balance sheet.
• Removes single points of failure: Cryptocurrency is decentralized, eliminating the possibility of a single point of failure, such as a large financial institution collapse.
• Easier to transfer funds: Cryptocurrency transfers can be faster and more secure than standard money transfers since they don't require third-party intermediaries.

Cons

• Extreme volatility: Cryptocurrency prices are highly volatile and subject to rapid surges and crashes due to their speculative nature.
• Cybersecurity risks: Cryptocurrency exchanges and wallets have been hacked, resulting in the theft of millions of dollars in coins.
• No intrinsic value: Cryptocurrencies are not backed by assets or earnings, so their value is based solely on speculation and sentiment.
• Regulatory risks: The lack of clear regulations around cryptocurrency adds risk, and a sudden regulatory crackdown could cause a market-wide price drop.
• High energy consumption: Cryptocurrency mining, particularly for coins like Bitcoin, requires a significant amount of energy, leading to environmental concerns.

In conclusion, cryptocurrency can be a risky investment, and it's important to carefully consider the pros and cons before deciding whether to include it in your portfolio. If you choose to invest in crypto, it's generally recommended to allocate a small portion of your portfolio, such as 5% or less, to this asset class.

Frequently asked questions