Imagine standing at the foot of two mountains, each with a potential path to wealth and prosperity. One is forged by traditional structures and entities. This is the mountain of Stocks. The other mountain, that of Bitcoin, is newer and carries an air of secrecy. It offers the allure of a new kind of financial liberation, a digital gold of the 21st century. This is the decision before us as we compare investing in bitcoin vs investing in stocks.
What exactly is investing? Simply put, investing the act of allocating resources, often money, with the expectation of generating an income or profit. One of the most popular and profitable ways of investing is to buy stocks.
Stocks, or equities, represent ownership in a company. Owning a stock grants you, the stockholder, a claim on part of the company’s assets and earnings.
Then, there’s Bitcoin. Emerging in 2009, Bitcoin is a type of cryptocurrency – a digital or virtual currency that employs cryptography for security. A network of global users running compatible bitcoin software allows for “consensus” to govern the network and rules to be enforced without intervention from a 3rd party. Open source software allows for permissionless mining, trading, and building on the network.
But compare investing in bitcoin vs in stocks?
They are fundamentally different assets, and you can’t invest the same dollar into both at the same time. Sure, they can they peacefully co-exist in your portfolio, but you still have to decide on how much to invest, and when.
This is going to be a beginner’s guide to investing in either, with a comparison of the pros and cons of each. I am not a financial advisor. I can’t give individual advice based on your specific situation, so consider that the article below is based on my own personal experience. Fair warning, it’s going to be very pro-bitcoin. Nothing wrong with stocks though. Just how I see the investing landscape in the 2020’s.
Investing in Bitcoin VS Investing in Stocks for Beginners
Investing in Stocks For Beginners
The stock market is a place where you can buy and sell shares of publicly traded companies. It is the place where fortunes have been made and and lost for centuries. It’s also a pretty standard place to store your “value” in the modern world. Because investing in stocks is such a common thing to do, it’s crucial to understand your choices when investing in stocks.
Investing In Individual Equities
Individual equities are one of the most direct methods of investing in the stock market. When you purchase an individual equity, you’re buying shares in a specific company. For instance, if you buy shares in the ABC Corporation, you become a shareholder in that company. You own a small piece of it.
Individual equities can offer significant returns if the company performs well. Take, for instance, the case of Apple. If you had purchased Apple stock back in 2002, your investment would have multiplied several times over. This potential for high returns is what makes investing in individual equities attractive to many investors. But remember, the potential for gains also comes with risks. If the company doesn’t perform well, the value of your shares could decrease.
As we continue, we’ll examine the tools you’ll need to analyze those prospects effectively and make informed decisions.
Investing In ETFs and Index Funds
Imagine stepping into a supermarket, brimming with a ton of products, but instead of spending your precious time and energy analyzing each individual item, you have the option to buy a basket that contains a little bit of everything. In the investing world, that’s what we call exchange traded funds (ETFs) and index funds. When you buy an ETF or an index fund, you aren’t buying one specific company. You are buying a basket of companies organized based on the goal of the fund.
Instead of putting all your eggs in one basket, you’re diversifying your portfolio across a range of equities without having to buy each one individually. This allows you to invest in a group of companies, or track the price of a market without taking on the individual risk of a specific management team.
For example, you can invest in basket of marijuana companies, expecting growth in the sector. As this new type of business takes hold in the US, no doubt many new companies will, and 80% of them will go bankrupt along the way. By investing in a marijuana ETF, you can track the growth of the sector without checking quarterly reports of any one specific company.
This way, your investing becomes more about capturing the performance of an entire market segment rather than banking on the success or failure of a single company.
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Basics of How to Value an Equity
Now that you know the beauty of ETFs and Index Funds let’s turn our attention to individual equities.
Price to Earnings (P/E) Ratio
The Price to Earnings ratio, commonly known as P/E ratio, is an important valuation metric in the financial world. It measures how much investors are willing to pay for each dollar of a company’s earnings. It’s kind of like how much you’d be willing to pay for a slice of the world’s best pizza. If people are queuing up around the block for a taste, the price of that slice is probably going to go up. Similarly, a high P/E ratio often suggests that the market has high hopes for a company’s future earnings growth.
Just because people are willing to pay a high price, doesn’t actually mean a company can delivery. A high P/E ratio could mean there are more speculators than investors, and the stock is overpriced. On the contrary, a low P/E ratio might indicate an undervalued company or perhaps a firm facing some troubles.
Therefore, while the P/E ratio is a good starting point for assessing a stock’s value, it should be used in conjunction with other financial indicators to paint a more comprehensive picture.
Book to Value Ratio
Imagine you’re at a garage sale and you spot an antique table. The price tag says $100, but you have a hunch it could be worth more. That’s where you need to assess its value. Similarly, the “Book to Value” ratio in investing is like your secret tool at that garage sale. It tells you if you’re paying too much, or perhaps getting a deal.
The Book to Value ratio, or simply the “Book Value,” is calculated by taking a company’s physical assets (like its buildings, equipment, and inventory), subtracting all the debts and liabilities, and then dividing by the number of outstanding shares. If the ratio is lower than 1, it might be a bargain. However, just like that table at the garage sale, it might require a little refurbishment – or in our case, business transformation. If the ratio is high, you may be paying more for the stock than its net assets are worth.
This type of assessment is more useful to value companies with lots of physical infrastructure, as they have lots of physical assets. This is opposed to something like a software company, which creates most of its value as software. This makes it hard to put an exact valuation on their assets. It’s easier to value a truck than it is to value an app.
Consideration of the Management Team
You wouldn’t hop on a bus without a reliable driver, would you? The same principle applies to companies. A talented, trustworthy management team can guide a company on the path to success, even through bumpy roads and detours. As an investor, you’re effectively entrusting your money to this team.
A great team, led by an unwavering CEO can navigate the company ship through booms and busts. Steve Jobs, Elon Musk, Howard Shultz, and Jeff Bezos are examples of rockstar CEOs who have create billions of dollars in value for shareholders.
When assessing the management team, consider their track record. Do they have a history of driving companies to profitability? Look for signs of strategic vision, business acumen, and effective communication. Remember, a ship is only as good as its captain.
Where Can You Buy Stocks?
Fidelity
With over 70 years in the business, Fidelity has successfully navigated through various market conditions, assisting millions of individuals and institutions in growing their wealth.
What makes Fidelity stand out is their diverse investment options, including stocks, bonds, ETFs, and mutual funds, along with robust research tools to help you make informed decisions. Plus, they offer financial planning and retirement services, ensuring a holistic approach to wealth management.
They even have bitcoin investment options, and recently submitted an application for a bitcoin ETF.
Ally Invest
Ally Invest, a subsidiary of Ally Financial, has ascended rapidly to the top of the pack as a preferred platform for stock investing. It’s particularly appealing to new investors, thanks to its user-friendly interface, zero-commission trades, and accessible customer service. It is a fine example of the evolution in the investment arena, blending the benefits of traditional firms with modern technology.
Ally Invest offers a range of investment options, from individual stocks to ETFs, mutual funds, and even options contracts. Its Research & Tools section provides novices with vital information to learn about the market, the performance of companies, and track economic events. For those looking for a more hands-off approach, Ally Invest also provides an automated portfolio management service – the Robo-advisor.
Vanguard
Vanguard, a stalwart of the investment world, has long been revered for its low-cost index funds and ETFs. Its inception in the mid-70s by John Bogle introduced the first index mutual fund to individual investors, bringing about a seismic shift in the investment landscape.
Vanguard’s unique structure where the funds themselves own the company, ensures that they operate at cost. This “at-cost” operation often results in lower expense ratios for investors and puts Vanguard in a league of its own.
Vanguard’s user interface is less intuitive than its contemporaries, which can deter less tech-savvy individuals. It also imposes minimum investment amounts on many of its mutual funds, making it less accessible for those with smaller investment capital. Additionally, while it offers individual stocks and bonds, its focus remains firmly on mutual and index funds.
Pros and Cons of Using Traditional Investing Companies
Traditional investing companies, such as Fidelity, Ally Invest, and Vanguard, have been the bedrock of financial investing for decades. Their enduring presence in the market is a testament to their robustness and reliability.
Pros:
- Track Record: They have proven track records spanning many market cycles, offering investors reassurance of their stability and expertise.
- Extensive Offerings: They provide a comprehensive suite of investment options, from stocks and bonds to mutual funds, ETFs, and more.
- Investor Education: Many offer comprehensive resources for investor education, making them a good choice for beginners.
Cons:
- Less Intuitive Platforms: Traditional companies may lack the sleek, intuitive user interfaces of modern fintech platforms, which can deter younger or tech-savvy investors.
Modern Fintech Stock Investing Platforms
Robinhood
Robinhood has been a game-changer in the investment world, shaking up the status quo with its commission-free trades and sleek, user-friendly app. Geared toward millennial investors, it allows individuals to invest in stocks, ETFs, options, and even cryptocurrency.
However, its simplicity can be a double-edged sword. While it may appeal to beginners, it lacks the 1-on-1 customer service that more traditional investors may value.
CashApp
Primarily known as a peer-to-peer payment app, CashApp also allows users to invest in stocks and bitcoin. It is designed for convenience, enabling you to send money, invest, and even receive your paycheck, all from one platform.
You can invest in fractional shares of stocks, or even send stocks to other CashApp users quite easily, which is quite difficult anywhere else.
Despite its convenience, CashApp may not be the best choice for serious investors. Its investment options are limited compared to other platforms.
Pros and Cons of Using Modern Fintech Platforms
Modern fintech platforms have democratized investing, making it more accessible to the masses. But like everything, they come with their own sets of advantages and drawbacks.
Pros:
- Ease of Use: Most platforms have highly intuitive interfaces, making it easy even for novices to start investing.
- Low Costs: Many fintech platforms offer low or even zero-commission trades.
- Convenience: These platforms often integrate other financial services, offering a one-stop-shop for users’ financial needs.
Cons:
- Limited Offerings: Some platforms offer limited investment options, which may not be suitable for investors looking to diversify their portfolios.
- Lack of Support: Many fintech platforms do not offer comprehensive customer service or educational resources, which can be problematic for new investors.
Reasons To Invest In Stocks VS Other Types of Assets
When contemplating the vast amount of investment options, you might wonder: why should I choose stocks? To answer this, we need to explore what makes stocks a compelling choice for investors.
- Potential for High Returns: Over long periods, investing in stocks has historically provided higher returns compared to other asset classes. While it’s true that past performance is not indicative of future results, historical returns of the stock market have shown that U.S. stocks have had an average annual return of about 9.82%.
- Ownership and Influence: Buying stock means buying a piece of a company, which comes with voting rights. While individual investors may not have a significant sway, the principle of influence and participation in a company’s future is enticing.
- Dividends: Some stocks pay out dividends, providing investors with a regular income stream in addition to potential capital gains.
- Liquidity: Stocks are highly liquid compared to other investments like real estate. This means you can buy or sell shares in a company almost instantaneously during market hours, providing flexibility.
- Ease of Diversification: With thousands of stocks available globally across different sectors, it is easier to diversify your investment portfolio, which can help spread risk.
The following chart from MacroTrends illustrates the historical annual returns of the S&P 500 over the last 30 years:
While these attributes make a strong case for investing in stocks, it’s important to temper these advantages with the understanding that higher potential returns come with higher risks.
Looking at other types of assets:
- Bonds: Bonds typically offer lower returns than stocks but with less volatility, making them suitable for risk-averse investors. They provide regular income through interest payments and return the principal upon maturity.
- Real Estate: Real estate can provide a steady income stream through rental payments and potential appreciation in property value over time. However, it requires significant upfront capital, is illiquid, and carries risks such as property damage or vacant periods.
- Commodities: Investing in commodities like gold can act as a hedge against inflation and provide diversification. However, their prices can be highly volatile and influenced by factors such as geopolitical events and natural disasters.
- Cash: Holding cash or cash equivalents (e.g., money market funds) provides stability and liquidity but offers minimal returns that usually don’t even keep up with inflation.
In conclusion, investing in stocks can offer substantial rewards and opportunities for growth in your portfolio, but it is not without risks. Like any investment decision, the choice to invest in stocks should be based on your financial goals, risk tolerance, and investment horizon.
Investing in Bitcoin For Beginners
How Bitcoin Can Benefit a Traditional Portfolio
Due to its limited supply Bitcoin, can act as a hedge against inflation. As we know, central banks worldwide can print more money, often leading to inflation. Bitcoin, with its capped supply of 21 million coins, stands impervious to such monetary policies. This characteristic gives Bitcoin “digital gold” status.
Just looking at monetary returns, the main benefit of investing in bitcoin for today’s buyers is that you can allocate as little as 1% of your portfolio to bitcoin and increase the rate of return of a standard stock portfolio.
1% is such a small allocation that the volatility and drawdowns are worth the upside potential for the average investor.
You Don’t Need To Be An “Expert” To Invest In Bitcoin
Bitcoin investing for beginners may seem daunting, and you might be wondering, “should I invest in Bitcoin even if I don’t fully understand it?” The answer, quite simply, is yes.
Consider this – a significant portion of investors do not fully grasp the intricate workings of stocks or bonds they invest in. Yet, they recognize the potential for growth and the benefits of diversification these assets provide.
Similarly, while the underlying technology of Bitcoin, may be complex, you don’t need to understand every detail to invest. It’s more important to comprehend Bitcoin’s value proposition – a decentralized, finite digital asset that isn’t controlled by any government or entity.
It’s important to learn self custody along the way, but take baby steps. Nobody starts out a bitcoin expert. It’s new to all of us at some point.
With Bitcoin’s track record and growing acceptance, its market shows promising potential, regardless of the complexity. So, arm yourself with basic knowledge, partner with trusted platforms, and take that first step in your Bitcoin investment journey.
Methods of Investing in Bitcoin
There are various paths to investing in Bitcoin. I’ll be straight with you right away. To really “own” bitcoin, you need to self custody the bitcoin, hold your own keys, and secure a hardware wallet with backup phrase. I’ll get into that below, but just be aware that some of these other options for investing in bitcoin are not really bitcoin. They are essentially tracking bitcoin’s price, but they come with their own set of unique risks.
Bitcoin Stocks
Bitcoin stocks or Bitcoin-related stocks are shares in companies that are engaged in Bitcoin-related business activities. They could be Bitcoin mining companies, Bitcoin hardware manufacturers, or even financial services companies that facilitate Bitcoin trading.
Bitcoin stocks can be bought and sold just like any other stocks, and they offer a way to gain exposure to Bitcoin without owning the digital currency directly. However, remember that you’re investing in the company, not the currency, and company-specific risks apply.
Custodial Bitcoin on Exchanges
Custodial Bitcoin on exchanges refers to purchasing Bitcoin and letting the exchange hold your assets. This method is perhaps the most common and straightforward way to invest in Bitcoin. It’s simple, user-friendly, and you don’t need to worry about managing your own private keys.
Exchanges like River, Cash App, Swan, or Kraken allow you to purchase, sell, and hold Bitcoin. However, this method relies on the security of the exchange – if the exchange is hacked, your Bitcoin could be at risk.
Self-Custody Bitcoin
Self-custody, or holding your own Bitcoin, involves managing your own private keys. Essentially, you’re your own bank. This method offers the highest level of control and eliminates third-party risk. However, it requires a higher level of knowledge and responsibility, as loss of your private keys means losing your Bitcoin forever.
Much of the educational material you see in the bitcoin space will encourage users to hold their own keys, and my site Bitcoin Foqus is no different. When the shit hits the fan, as it’s known to do in the world of Bitcoin, you can breath a sigh of relief knowing your bitcoin is safe in cold storage and none of the chaos can touch you.
Buying Bitcoin On Bitcoin-Only Exchanges
Certain platforms have specialized in facilitating Bitcoin transactions, providing a focused, comprehensive environment for Bitcoin enthusiasts and investors. These Bitcoin-only exchanges are the springboards for getting your feet wet and getting some skin in the game.
For those ready to embark on this journey, two US Bitcoin exchanges stand out: Swan Bitcoin and River Financial.
Swan Bitcoin (affiliate) offers an intuitive platform for Bitcoin investing, making it an excellent choice for beginners. They provide a unique service that automates your Bitcoin purchases, allowing you to consistently invest at regular intervals, a strategy known as dollar-cost averaging.
River Financial (affiliate), on the other hand, targets more seasoned investors with advanced features like performance tracking and premium customer support. They offer not only a trading platform but also a full suite of financial services tailored to Bitcoin.
There are several other US-based exchanges that allow you to buy and sell bitcoin such as Coinbase, Kraken, and Gemini, but they also encourage altcoin trading and various other token gambling incentives, so I tend to not recommend them.
Benefits of Self-Custody Bitcoin
As the saying goes, “Not your keys, not your Bitcoin.” This phrase is the guiding principle behind the concept of self-custody, a unique advantage of Bitcoin over traditional assets.
When you self-custody your Bitcoin, you are essentially acting as your own bank. You have complete control over your digital assets, as opposed to trusting them to a third-party entity. This eliminates the risk of third-party failures or restrictions on your funds.
However, with great power comes great responsibility. Self-custody requires management of your private keys. If lost, your Bitcoin could be irretrievable. Managing your private keys is not extremely complex, but it does require care.
Thus, self-custody is not for everyone. It’s for those willing to embrace the principles of sovereignty and personal responsibility that Bitcoin requires. As we navigate this new digital frontier, embracing continuous learning and prudent risk management will be our greatest allies.
Last Look: Investing In Bitcoin VS Investing In Stocks
When comparing investing in bitcoin vs investing in stocks, there are a few main things to look at as you decide which to buy, and how much to buy of each.
Custodial VS Non-Custodial
With stocks, there is no option but to have a custodian hold your stocks. With bitcoin, you have the option to self-custody.
For many people, this would be a benefit of owning stocks since they don’t have to worry about any technical aspects around custody. You can’t really get your stocks “stolen” from you, so there aren’t the same risks of stocks in your brokerage account as there is holding bitcoin on an exchange. In other words, holding stocks is easy.
Holding non-custodial bitcoin in your own bitcoin wallet is the only way to ensure that your bitcoin really exists. Exchanges are great for buying and selling bitcoin, but there have been many cases of exchanges abusing customer funds by investing them, lending them out, or simply being irresponsible and losing keys.
Sector Specific Investment VS Global Usability
With stocks, you have the advantage of being able to invest in specific parts of the market, right down to individual companies. After doing some research, you can choose to invest in a specific company, group of companies, or sector of the market. You can even go broader and invest in the entire US economy, developing markets, or an index tracking the returns of the global market of publicly traded companies.
With stocks, if you have deep knowledge about a specific part of the economy, you can find investment opportunities. By doing the proper research and due diligence, you can outpace broader market returns. You can make money, even when markets are doing poorly by investing in the right sectors of the economy.
Bitcoin, by contrast is non-specific. Bitcoin is money, and useful for any transaction requiring money. That means bitcoin can be used by every single business and person everywhere in the world.
The benefit of investing in bitcoin is that as global adoption increases, bitcoin becomes more scarce, so your bitcoin holdings should increase in purchasing power. You don’t need a specific company, market, or country to perform. You just need people behave according to their incentives, and eventually bitcoin will catch on.
As long as there’s a desire for individuals to store and exchange value freely, bitcoin adoption should increase.
Standard Returns VS Parabolic Returns
When you invest in a broad stock market index fund, you pretty much know what to expect. You’ll get about 10% returns every year on average. That’s what’s happened for the last 120 years. Assuming 2% inflation, that means you’ll earn enough on your money to “beat” inflation, and make a little bit extra on top. It’s the safe bet.
Bitcoin by contrast, has never existed before. It’s truly unknown what the future holds for the price of bitcoin. It’s is only 10 years old and there’s somewhere around 1% penetration globally. This type of opportunity doesn’t come along very often. As of 2023, we’re still very, very early in terms of global adoption of bitcoin.
If bitcoiners are right, and bitcoin will be saved and traded globally over the coming decades, the price is going to skyrocket. If everyone in the US put just 1% of their assets into bitcoin, the price would be double what it is now, at $50,000 per BTC. You can imagine what that number would be as people get comfortable with the asset and creep closer towards 10% allocation globally.
It’s not hard to imagine a $1,000,000 bitcoin price, or even higher as global demand grows for bitcoin. There are something like 20 million millionaires in the world, and there are only 18 million bitcoin on the market, accounting for all the lost bitcoin. In terms of new bitcoin being mined, there’s only 1.5 million left for the next 100 years. What happens when FOMO hits?
There are a lot of reasons for the price of bitcoin to increase exponentially from where it is today, and there aren’t a lot of reasons for it to go to zero.
Volatility
Despite the promise of exponential returns over the next few decades, it’s still very hard for most people to stomach the volatility of bitcoin. Up 500% for the year, then down 80% from all time highs. This isn’t your grandpa’s stock market!
The volatility of bitcoin is hard even for many bitcoiners on their first bull run. There have been many high profile cases of bitcoiners getting overly euphoric during bull runs, then getting rekt on the way down. To the average investor, it may be simply too much to handle, even with a small allocation of their portfolio.
Stocks do have some volatility when compared to other asset classes, but much less so than bitcoin. The volatility of the broader stock market is nothing like 20% drawdowns in a single day we see in bitcoin. Market declines tend to happen over months and years. Plus, let’s not forget that there are market controls in place to stop cascading selloffs, and the Federal reserve is often laying in wait with liquidity programs if the market draws down too far, for too long.
As with all things investing, with risk comes reward. With the high volatility of bitcoin investing, you get the potential for outsized returns. With the tempered volatility of stocks, you get a smaller return.
Comfort Level And Confidence
During stock market drawdowns, most average investors can look at 100+ years of stock market investing and understand that if they just wait, the market will recover. The stock market isn’t going “bust” any time soon. It’s pretty well-known investment advice that buying during bear markets can decrease your cost basis and increase your returns. Very basic stuff here.
With bitcoin, there is always the looming threat of “this time is different”, and “bitcoin may never recover”. Is bitcoin finally dead?
If you’ve been around a few bitcoin cycles, you start to see the cyclical FUD, and you worry less about bitcoin dying, but for newbies, it’s a real fear. Stick around a few cycles and you’ll see what everyone is talking about, but the first bear market can be rough.
Engagement
When investing in stocks, you can just auto-invest and you never have to think about anything else after you set up your stock account. Just pick a broad market index, and you can pretty much leave it for 30 years. The broker pulls money from your bank account and invests it for you. They hold the stocks. They reinvest the dividends. The index fund manages what stocks to buy and sell.
It’s a huge step for people to start investing in bitcoin because it takes A LOT more responsibility to do it right.
You have to buy a wallet. You have to test the wallet and get familiar with it. You have to create an account at an exchange, and do manual withdrawals to your wallet for cold storage. You have to update the wallet firmware. You have to write down and protect your private keys. You’ll probably want to etch them in steel as well.
Multisig and UTXOs? Now that’s a bridge too far.
Why is bitcoin down 20% today? You may want to look at the news. Why is bitcoin up 20% today? Again, look at the news.
Buying and holding bitcoin is not a set-and-forget process. Because we’re still so early to bitcoin
Liquidity
The stock market is one of the most liquid markets in the world, but it’s not as liquid as bitcoin. Bitcoin trades 24/7 on a variety of global exchanges, meaning you can buy and sell bitcoin anywhere in the world, at any time of day. Not only that, but you can trade bitcoin directly for goods and services because bitcoin is not just an investment. Bitcoin is also money.
The US stock market isn’t available to many non-US investors, and you have to jump through a bunch of hoops as Americans to get access to non-US markets. Although the time from selling a stocks to the funds hitting your bank account via ACH or wire is probably similar to selling bitcoin for cash in the bank, with bitcoin, you always have the options of self custody.
Any time of day you can simply withdraw bitcoin from an exchange to your bitcoin wallet and have it accessible to spend in about 30 minutes. You may even be able to spend directly from the exchange! The bitcoin network works 24/7/365 and doesn’t require anyone to “approve” your transactions!
Final Thoughts
So there you have it. Stocks offer a tried and true investment opportunity and Bitcoin offers a chance to partake in a once in a lifetime investment opportunity. Remember, each comes with its own set of pros and cons, and what matters most is that your investments align with your financial goals, risk tolerance, and level of knowledge of each asset class.
James Altucher on Bitcoin: “There’s about 1000 man-years of science backing Bitcoin”
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