DeutschInvestors often believe that stocks and cryptocurrencies like Bitcoin cannot be compared. The proverbial comparison of “apples and oranges” is often cited. However, there are many more similarities than crypto novices can imagine. We will take a detailed look at how Bitcoin and stocks differ and where there are parallels. On both sides, you will find noteworthy points that you should consider before deciding for or against one (or even both) of the investment models.
Click here for part 1 of the CoinPro.ch series: Bitcoin or Gold?
Bitcoin and Stocks Can Complement each Other
An important point that deserves mention: Stocks and Bitcoin do not have to be compared according to the “either … or …” approach. To stay with the image, let’s say that there can also be a “both … and …”. Why? For the simple reason that there have long been connections between the two industries. Many crypto insiders point out that the blockchain model and thus digital currencies could not have emerged without the technical innovations of corporations such as Microsoft. If you extend the circle to the normal investment market by a good bit, the points of connection are even clearer. Financial products from the derivatives market – such as options, futures, certificates and contracts for difference (CFD) – expand the possible radius for investments in connection with Bitcoin, Ethereum, Cardano and Co. The range of products and the number of competitors in these areas have also grown significantly in recent years.
In this way, crypto investors can place targeted bets on price movements without buying directly, for example. Among other things, this approach allows hedging through speculation on falling prices when the value of your own wallet holdings falls in turbulent times. In the USA, investors have been waiting for months for the approval of the first Bitcoin futures by the responsible supervisory authority CFTC. But it is also interesting that there is already a whole range of stocks that have more or less clear points of contact with Bitcoin or rather with the blockchain. We will only pick out a few noteworthy economic sectors here.
Stock sectors related to the Bitcoin theme are:
- IT companies such as Microsoft or search engines such as Google
- Shares of graphics card & chip manufacturers such as Intel, AMD or Nvidia
- Securities of companies that develop wallets or operate mining
- Shares of crypto exchanges like Coinbase
Furthermore, Bitcoin and the blockchain are arousing desires in other industries such as the automotive and fashion sectors.
Worth reading is our overview of companies that are active in the crypto space and are listed on stock exchanges.
The Stock Market and Bitcoin Correlate (Frequently)
So investors can certainly benefit indirectly from the boom in the crypto market by buying stocks. But be careful: From the perspective of many analysts, the temporary gold rush mood on the crypto market has led to the fact that the previously quite manageable number of stocks in direct Bitcoin connection largely show overvaluations. With a little bad luck, investors can lose a lot of money in a short time in the event of a correction. The trigger for such risks was the run on “Bitcoin stocks”, because many investors had the clever idea to enter the market. There are some examples of massive losses that shareholders can use as a guide before buying. Some of the former big winners are now moving in the area of so-called “penny stocks”, i.e. stocks with a value close to zero. The risk is still high because the selection is too small. This creates price bubbles in the few stocks that have to burst at some point.
Basically, the data from the past shows that the stock markets and Bitcoin developments are often the same. If one is doing well, the other is doing well too. Unfortunately, also in the negative sense. But this in turn means that the two asset classes are not so different and stock investors can also invest in Bitcoin, because the developments are similar and the prior knowledge of stocks helps.
Politics and Investments – Bitcoin as a Savior in Times of Need?
But let’s return to the actual topic after this short excursion – the comparison of Bitcoin and stocks. Bitcoin is gaining new momentum these days due to developments in the field of artificial intelligence. The “Internet of Things” is also fueling the enthusiasm of many former shareholders for the crypto segment. The main difference between Bitcoin and stocks at this point: If the economy is weak, this leaves a negative impression on the stock market. Political decisions can be equally dangerous for stocks.
There are also Longer Crisis Phases on the Stock Market
If you compare the movements on the stock exchange and the courses of the Bitcoin price, both areas show temporary declines. Basically, the scale is open at the top, everything seems possible. Almost always, when this assessment also took hold on the international stock market, more or less clear corrections followed some time later. The credit crisis in the USA from 2006 can serve as a reference here. In the case of Bitcoin, such correction phases are at least shorter so far due to the high volatility, and counter-movements usually followed within a few months. Even if enormous price gains are conceivable for stocks, theoretical Bitcoin gains in a boom phase are much more profitable for investors.
In addition, massive slumps are usually overcome faster than on the stock market thanks to the susceptibility to fluctuations in both directions. Stock market crises usually last longer and often keep investors in suspense for weeks or even months – as we are unfortunately seeing at the global financial markets at the moment.
Storage of Coins and Securities
In the Bitcoin vs. stocks comparison, the question of storage must be addressed. Would you like to buy Bitcoin or invest in currencies such as Ether and Monero? Then you need a place to store your digital savings. A so-called wallet is the solution. These are available free of charge at many trading venues and crypto exchanges. However, a secure option is a cold wallet, where you store your access data outside the digital world. Users usually only incur costs for the wallets if they opt for a hardware wallet (such as from the French manufacturer Ledger). The expenses are usually only incurred once, and the external data carriers are also classified as particularly secure. Stocks must also be kept safe. Before the emergence of electronic stock exchanges, shareholders could keep securities after purchase on the trading floor at a physical stock exchange in the – attention cost factor – domestic safe.
Alternatively, stocks could be handed over to banks for safe custody. Such “real” custody accounts are superfluous today. But you also need a securities account for digital securities trading as a shareholder. Brokers and banks work here with different fee models. Three possible approaches are:
- generally free custody account management
- Free custody account management from a monthly/annual minimum trading volume
- fixed/variable fees depending on custody account value & trading volume
The search for a really cheap custody account can therefore be quite complicated. Especially since there may also be hidden additional fees in contracts for the stock custody account. In individual cases, there are also fees for trading on crypto exchanges – but wallets can often be used free of charge or are cheaper than a securities custody account with a branch or direct bank. So compare the wallet fees very carefully before making a purchase. Because fees have a small impact on your return or, in the worst case, on the amount of total losses.
Individual Interests are Decisive
Many small investors are still avoiding the market around Bitcoin. Instead, people with rather small budgets invest in the stock market because they believe their deposits are safer there. However, the crises on the stock exchange already mentioned above have shown more than impressively that speculative bubbles can destroy the assets of some investors within a very short time. So stock market investments are only safer to a limited extent compared to Bitcoin. This is primarily about the ratio of risk and return opportunity. In this very point, some Bitcoin owners have regularly been able to enjoy handsome profits in recent years. What is sometimes needed is staying power. Because despite the occasional price breakouts, crypto investors have to be patient. But when these acute breakouts occur, massive profits beckon.
Difference in the Possibilities for Profits
Technically speaking, the differences between Bitcoin on the one hand and securities on the other could hardly be more obvious. Because what are stocks? They represent a small share in a company that issues the said securities, in technical jargon one speaks of an issue. Anyone who acquires Bitcoin down to the smallest unit Satoshi (this corresponds to 0.00000001 BTC) becomes a market participant. But not directly a possible influencer with a kind of voting right as in stock trading. Although not every share automatically comes with a right to participate in action meetings. Bitcoin investors realize profits through a price increase. Depending on the securities, shareholders can also earn money in addition to the return on sale at a higher price via the so-called dividend. This is a variable profit participation if the stock company is doing well economically.
Massive Fluctuations in Bitcoin as an Opportunity and Risk
Cryptocurrencies are more closely linked to foreign exchange trading. As an investor, you trade Bitcoin and Co. in digital or virtual form. Investors exchange other digital currencies or fiat money such as US dollars or euros into Bitcoin units at the current rate. While price movements in fiat money usually show a rather small extent, crypto prices have fluctuated much more sharply so far. As I said: Compared to stock prices, the possible return also increases at the same time. Unfortunately, even experienced analysts find it difficult to make precise forecasts about price developments. Changes of several hundred percent within a few days cannot be ruled out for cryptocurrencies – such movements do not exist on the stock market or on the classic foreign exchange market. Those who are happy with returns appreciate this potential. Those who love security prefer to remain loyal to stocks.
Mining – Additional Income for Bitcoin Fans?
Bitcoin investors benefit from another special feature in the event of a case. With appropriate mining technology, they can actively increase their own income. Anyone who “mines Bitcoin” receives rewards within the Bitcoin blockchain. This aspect will be explained in more detail elsewhere, so it should only be mentioned briefly here as a distinguishing feature from stocks. While shareholders can only buy and sell, miners in the Bitcoin universe are involved in the creation process and even earn additional money as a result. However, mining is strictly speaking already the “higher school” to earn money with Bitcoin. In addition, there are considerable costs for electricity and the necessary technical framework conditions.
Speed of Trading – an Argument for Bitcoin?
If there is an advantage of digital currencies for payment transactions and trading that speaks more for Bitcoin than for stocks and comparable securities, it is the execution speed when transferring coins or smaller components. The blockchain enables very fast transactions, which is increasingly making these and other coins a global means of payment for consumers. If you look at the commissions, custody account fees and other fees associated with stock trading, Bitcoin (and some altcoins even more so) performs significantly better. Although some operators of a crypto exchange also charge fees, these are usually lower than those charged by brokers and banks. When transferring money, the costs for transactions via blockchain are also lower than for bank transfers. Bitcoin buyers and sellers often find each other within seconds via the platforms. Transactions from wallet to wallet are completed just as quickly around the clock.
An overview of the right providers: Buy and trade Bitcoin
The Time Factor when Trading Bitcoin or Stocks
Finally, it should be added that time also plays a role in the trading scope itself and not only with regard to the duration of a transaction. Stocks can also be traded over-the-counter (i.e. away from the actual stock exchanges). However, only the “real” stock exchanges offer regulated security. And these are bound to opening hours worldwide. Crypto trading with Bitcoin, Ripple or Bitcoin Cash can be carried out via the platform at any time of the day or night. You will usually look in vain for time restrictions in a positive sense. And there is another advantage compared to trading stocks. If you link your wallet to the trading accounts of various Bitcoin exchanges, you can trade in different places with your access data and choose between different conditions. If you keep stocks in the custody account of a broker that you think is too expensive, you must first transfer your holdings to a competitor. Only when this process is complete can you start trading with the new provider.
Bitcoin fans are also much more flexible in this point. The compelling argument for ambitious investors who are aiming for high returns is that Bitcoin ultimately wins the comparison with stocks primarily because of the enormous potential returns.
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CoinPro.ch series: Compares asset classes:
Part 1: Bitcoin or Gold?
Part 2: Bitcoin or stocks?
Part 3: Bitcoin or real estate?
Part 4: Bitcoin or ETFs?
