Whether to invest in stocks or cryptocurrency will be a decision every first-time investor has to face. Five years ago, the decision would have been simple but with the rise in popularity of crypto and the opportunity for the significant investment gains it offers, could crypto be the better path into investing?
Beginners should invest in stocks rather than cryptocurrency. Stocks are the best tool at beginner investors disposal for building wealth. Whilst cryptocurrency can produce astronomical investment returns, the volatility of this asset class makes it unsuitable for beginner investors.
My stance on investing and building wealth hasn’t changed. Develop as large a surplus between your income and your expenses as you can and invest this difference into a low-cost, broad index fund over the long term. This strategy is effective if unspectacular whilst it is too early to say the same about cryptocurrency investing.
Having said this, once beginner investors have started investing on a monthly basis into the stock market, I am not against adding some Crypto exposure to your wider investment portfolio.
Are stocks or cryptocurrency a better investment for beginners?
Stocks are a better initial investment for beginners than cryptocurrency. Whilst crypto can produce significant investment returns and does have technological utility, young investors would be much better off learning the fundamentals of stock market investing and building gradual, steady wealth.
When it comes to investing, one of the key principles is to invest for the long-term and not ‘sell low’ due to fear of your investment going down.
In my experience, the best way of achieving this is to automate your investing habits via a monthly direct debit to your investing account and an automatic investing instruction without your account.
A truism of the stock market is that it trends upward over a long time period but fluctuates (sometimes wildly) over the short term. Investing in the automated fashion I laid out above helps prevent the negative emotions like fear or greed associated with these fluctuations which are the key reasons many people lose money in the stock market.
My view is that whilst cryptocurrency is an amazing innovation that will almost certainly improve the world in time, it is not a good asset class for beginner investors simply because of its volatility and the impact this could have on novice investors confidence.
For example, let’s say a beginner investor was gifted £1,000 on the 1st April 2021 and decides to invest it in Bitcoin. At the time, 1 Bitcoin was worth £42,480 so the investor would be able to purchase 0.024 Bitcoin.
Three months later, the value had fallen to £25,337 per Bitcoin. This means the investors £1,000 investment would have fallen to £596, over a £400 loss in just three months. This type of fall may put the individual off investing his money again which would have awful consequences for his long-term wealth.
If the investor had invested the same £1,000 in the S&P500 stock market index, it would be worth £1,069 representing a modest 6.9% increase in the three month period. Psychologically, this would be a huge win for a new investor who can see how investing their money will produce returns far exceeding typical current account interest rates.
Why stocks are a better investment for beginners than crypto
Stocks are a better investment for beginners than crypto as they are less volatile and their ‘value’ is much easier to understand. Whilst crypto may make up a percentage of every investor’s portfolio, gaining an understanding of investing principles via the stock market should be the first priority.
Most investors instinctively understand what is meant by the term ‘volatility’ but for the avoidance of doubt, volatility can be defined as a “statistical measure of the dispersion of returns for a given asset.” Generally speaking, the more volatile an asset is, the riskier it is for an investor.
Prior to the introduction of crypto-currency, stocks were seen as the most volatile of the popular asset classes with returns rising and falling far more dramatically than less volatile asset classes like bonds or real estate.
However, since Cypto’s rise in popularity, it has replaced stocks as the single most volatile asset class. This can be an attractive proposition to novice investors, especially when they hear stories of other non-experts amassing significant wealth in a short period of time.
Why crypto may be a better starting investment than stocks
Crypto-currency enthusiasts would argue that crypto is a better investment for beginners than stocks as this is the only asset class that has the capability of producing true wealth over a short time period. Whilst the stock market is a proven vehicle for producing wealth over time, it typically takes many years.
Those who have had success investing in cryptocurrencies will often agree that the stock market is a reliable tool for getting rich over time but suggest that being rich when you’re 70 shouldn’t be the aspiration. Rather, by investing in crypto-currency, you give yourself the chance of becoming truly wealthy in just a few years if you invest in the right coin at the right time.
There is also the argument that cryptocurrency is the future, whilst the stock market is the past. If the world is to ultimately adopt a crypto-currency based monetary system, does it not make sense to invest in predominant crypto assets like Bitcoin or Ethereum as early as possible?
Is Cryptocurrency more profitable than stocks?
Cryptocurrency is not necessarily more profitable than stocks. Whilst some crypto investors will have dramatically outperformed the stock market in recent years, this certainly isn’t the case for every crypto investor. Due to the privacy and regulatory time-lag, it’s hard to accurately compare the performance of Crypto investors with stock market investors.
Having said that, if we use Bitcoin as a proxy for Cryptocurrency investing and the S&P500 as a proxy for stock market investing, the results are interesting.
|Asset||Bitcoin (total % increase)||S&P500 (total % increase)|
Based on the above, clearly over the last 6 months, last year and last 5 years, Bitcoin has performed better than the S&P500 and would have been a more profitable investment over these time periods.
However, there are a few caveats to this. Both Crypto and stock market investors will often try and find the new big coin, or the next big stock in an attempt to achieve huge investment returns. However, more often than not, these tactics are less successful than investing in a broad-based index fund (like the S&P500) or an established cryptocurrency coin (like Bitcoin).
It’s also worth noting that the S&P500 has a significant history behind it, regularly performing well with well-established laws underpinning it. Bitcoin, on the other hand, is a relatively new asset class and it’s reasonable to say that the legal and regulatory environment is still catching up which could have significant implications in the future.
What are the best cryptocurrency stocks to invest in?
Investors can achieve exposure to Cryptocurrency without actually purchasing crypto coins themself by purchasing stocks of cryptocurrency-focused corporations. This allows investors to “bet” on the long-term success of crypto-currency by investing in stocks like Tesla, which hold substantial amounts of Bitcoin on their balance sheet.
For those who are sceptical or fearful of investing in crypto coins themselves, this seems like a nice alternative. Investors can buy stocks that either hold crypto-currency themselves or businesses which are crypto-focused in nature and benefit from the growth in these corporations without exposing themselves to direct coin investing.
What is meant by cryptocurrency ‘Altcoins’?
Cryptocurrency ‘altcoins’ are simply ‘alternative coins’ which typically refers to any cryptocurrency that isn’t Bitcoin (BTC). These coins will share both similarities and differences with Bitcoin and can range in popularity and utility from the highly successful ‘Ethereum’ to other unheard-of coins.
As of the time of writing, there are over 15,000 different cryptocurrencies. The Bitcoin and Ethereum duo account for over 60% of total investment into cryptocurrencies with other altcoins making up the remainder.
Typical altcoins include ADA Cardano, XRP, Tether, Dogecoin and Solana.
What are the best Altcoins to invest in?
The most popular altcoins to invest in are Ethereum, Cardano, Tether, Binance Coin and Solana. Some crypto investors look for recently established coins to invest in in order to benefit from the rise in price from a very low starting level. This type of investing is far riskier than purchasing established coins such as those listed above.
Is Crypto more risky to invest in than stocks?
Investing in cryptocurrency is riskier than investing in stocks. Generally speaking, the rule-of-thumb that the higher the expected returns, the higher the risk holds true, with the extra returns rewarding investors for the risk they have accepted.
Unlike stock market investing, cryptocurrency values aren’t based on the performance of the underlying companies as stock market prices are. Due to this, cryptocurrency valuations are impacted by intangibles like speculation, hype and media coverage than stocks are.
A good example of this is DogeCoin, whereby the value fluctuated wildly based on tweets by Elon Musk. This susceptibility to manipulation makes crypto riskier than stocks, which have established laws to prevent these practices.
Whilst stocks aren’t fully immune to media coverage impacting the stock price by any means, the performance and viability of the company remain intrinsically linked to the stock price in almost all cases.
How to start investing in Cryptocurrency in the UK in 2021
Whilst I continue to believe stock market investing, and specifically index fund investing, is the best choice for novice investors, cryptocurrency is becoming increasingly popular.
If you have made the decision to start investing in crypto, make sure you first get a thorough understanding of what you are doing and exactly what you are investing in by reading a good guide like this one.
As always, please remember I am an Accountant, but not your Accountant. In this post (and all of my others) I share information and oftentimes give anecdotes about what has worked well for me. However, I do not know your personal financial situation and so do not offer individual financial advice. If you are unsure of a particular financial subject, please hire a qualified financial advisor to guide you.
This article has been written by Luke Girling, ACA – a qualified Accountant and personal finance enthusiast in the UK. Please visit my ‘About‘ page for more information. To verify my ACA credentials – please search for my name at the ICAEW member finder. Please comment below or contact me here to get in touch with questions or ideas for future posts.