Bitcoin Vs. Stocks: Where Should You Invest?

Bitcoin and stocks are two very different types of investments, each with its own set of risks and potential rewards. On the one hand, Bitcoin is a cryptocurrency with a finite supply that is decentralised and not controlled by central banks or governments. On the other hand, stocks represent fractional ownership in a business, giving shareholders a claim on the company's assets and cash flow. While both investments have their pros and cons, it's important for investors to understand the differences and carefully consider their financial goals and risk tolerance before deciding where to put their money.

Pros and cons of investing in Bitcoin vs stocks

Pros of investing in cryptocurrency

• Cryptocurrency is decentralised, so it's not controlled by central banks or governments.
• It can act as a hedge against fiat currency.
• There is 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 of investing in cryptocurrency

• Extreme volatility.
• Cybersecurity risks.
• No intrinsic value.
• Regulatory risks.

Pros of investing in stocks

• Long history of solid returns.
• Intrinsic value.
• Accessible.
• Stronger regulation.

Cons of investing in stocks

• Volatile.
• Lower potential for extreme gains.

How to buy Bitcoin

There are several ways to buy Bitcoin, including:

• Cryptocurrency exchanges: You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a range of cryptocurrencies and carry different fees and consumer protections.
• Traditional stockbrokers: A few traditional investment brokers, such as Robinhood, Webull, TradeStation, and Fidelity, offer access to Bitcoin trading.
• Money transfer apps: Cash transfer services like PayPal, Venmo, and Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps.
• Bitcoin ATMs: These ATMs allow you to buy and sell Bitcoin with cash, and they are often placed in locations where you would find regular ATMs.
• Bitcoin exchange-traded funds (ETFs): The SEC recently approved spot Bitcoin ETFs, which trade over major exchanges and track the price of Bitcoin. These are available through traditional brokerage accounts.
• Peer-to-peer (P2P) money transfer apps: P2P exchange services, such as LocalBitcoins, provide a direct connection between users looking to buy and sell Bitcoin.

Regardless of the method you choose, there are a few key steps to buying Bitcoin:

• Choose a crypto-trading service or venue: Select a cryptocurrency exchange, broker, or payment service that suits your needs and offers the features you want.
• Connect your exchange to a payment option: You will need to link your bank account, debit card, or credit card to your chosen platform. Note that credit card processing fees can be high, and some exchanges may not accept credit cards due to the risk of fraud.
• Place an order: Decide how much Bitcoin you want to buy and place your order on the platform.
• Ensure safe storage: It is recommended to store your Bitcoin in a digital wallet, either a hot wallet (online) or a cold wallet (offline). Hot wallets are more convenient for active trading but are less secure, while cold wallets are considered more secure but require technical knowledge to set up.

How to store Bitcoin

When you buy Bitcoin, you are given a public key, which is your wallet address, and a private key, which allows you to access your Bitcoin. Your Bitcoin ownership is safely recorded, stored, validated, and encrypted on the blockchain.

There are several ways to store your Bitcoin, each with its own pros and cons.

Custodial Wallets

Custodial wallets are managed by a third party, such as an exchange like Coinbase, who stores your private keys for you and guarantees their safety. While convenient, they come with the risk of hacks and theft.

Non-Custodial Wallets

Non-custodial wallets, on the other hand, give you full ownership of your keys. These can be either hot or cold wallets.

Hot Wallets

Hot wallets are software that stores your keys and have connections to the internet. They are convenient for small amounts of cryptocurrency or crypto that is actively trading. However, they are vulnerable to hacks. Examples include desktop, mobile, and web-based wallets.

Cold Wallets

Cold wallets, also called offline wallets or hardware wallets, are not connected to the internet and are, therefore, a much safer option. Examples include hardware wallets like Ledger, Trezor, and Coldcard, as well as paper wallets and USB drives.

When choosing a storage option, consider factors such as the amount of Bitcoin you have, how often you plan to spend or send it, and your level of technical expertise. For large amounts, a combination of hot and cold wallets can provide a good balance between security and usability. Additionally, it is important to back up your Bitcoin wallet regularly and take other security precautions to protect your private keys.

Bitcoin's value

Bitcoin's future price performance will likely depend on its adoption as a legitimate global currency and its popularity as an inflation hedge and store of value for investors.

The price of Bitcoin can be extremely volatile. In 2022, it fell more than 75% from its all-time high. Transactions are also irreversible, and people have lost millions of dollars by losing or forgetting their wallet credentials.

Bitcoin is a risky investment, and it is generally recommended that you only invest if you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment. It is recommended that you do not invest more than 10% of your portfolio in Bitcoin or other risky assets.

Regulatory status of Bitcoin

Bitcoin and other cryptocurrencies are freewheeling by nature, transcending country borders and specific agencies within a government. This poses a challenge to policymakers who are accustomed to dealing with clear-cut definitions for assets. The regulatory status of Bitcoin varies across jurisdictions, with some countries imposing outright bans or partial restrictions while others are yet to enact relevant legislation.

In the United States, the regulatory landscape for Bitcoin is complex and involves multiple federal agencies and state governments. While the Internal Revenue Service (IRS) treats cryptocurrency as property, the Commodity Futures Trading Commission (CFTC) considers it a commodity. This disparity extends to the state level, with states like New York requiring cryptocurrency startups to obtain a BitLicense with stringent disclosure requirements, while Arizona recognises smart contracts.

The Securities and Exchange Commission (SEC) regulates assets it determines to be securities but has not yet regulated Bitcoin. However, it does regulate investments or derivatives related to Bitcoin. The classification of cryptocurrencies as securities, utility tokens, or transactional tokens has significant implications for regulatory compliance.

The unique characteristics and global portability of cryptocurrencies present a challenge for regulators. The international portability of cryptocurrencies, such as their ability to transcend borders, adds to the regulatory complexity. The lack of consistent definitions and classifications for cryptocurrencies across jurisdictions further complicates the regulatory landscape.

Some countries, notably in Asia, offer insights into approaches to dealing with cryptocurrencies. Japan, for example, officially recognised cryptocurrencies as property in its Payments and Services Act and developed a regulatory framework in 2017. South Korea, on the other hand, has plans to impose a 20% tax on cryptocurrency profits exceeding 2.5 million South Korean won, with this measure scheduled to take effect in 2025.

The European Union (EU) has taken steps towards regulating cryptocurrencies, with the European Central Bank classifying Bitcoin as a convertible decentralised virtual currency. The EU's Markets in Crypto Assets (MiCA) regulation, which came into force in June 2023, provides a framework for defining and regulating cryptocurrency assets within the bloc.

The regulatory landscape for Bitcoin and other cryptocurrencies is evolving, with a growing recognition of the need for coordinated global approaches to address the challenges posed by these innovative technologies.

Frequently asked questions