While the practice of investing in equities or stocks has been around for a long time, bitcoin and cryptocurrencies are a more recent phenomenon. Stock trading started with the trade of shares belonging to the East India Company shares on the London stock exchange in 1773. Following which, the Bombay Stock Exchange or BSE was established in 1875, and has emerged as the world’s leading stock market.
Launched in 2009, Bitcoin is the world’s largest cryptocurrency by market capitalization. Bitcoin is created, distributed, traded, and stored through a blockchain which is a decentralised ledger system. This feature distinguishes bitcoin from fiat currencies.
The following are a few points that compare stocks and bitcoin to help you make a better decision regarding investments.
Market capitalization:
According to a World Bank report, the total market capitalization of world equity markets by the end of 2020 was US $133.769 trillion. Against this, the market capitalization of bitcoin in June 2021 was US $600 billion.
Trading patterns and precedents:
Stock trading has established patterns and enough historical precedents. There is an established body of knowledge for stock trading. You can analyse stocks using both fundamental and technical analysis. On the other hand, investing in bitcoin is speculative and lacks the predictors and calculators that stock investing does.
Regulation:
Stock markets have central regulators in various countries like, the S.E.C in the U.S and SEBI in India to regulate the functioning of exchanges, brokerages, and depositories. Bitcoins are unregulated at present.
Returns:
Historic returns for the Sensex 30 in India since 1979 have been over 15% p.a. (CAGR) Compound Annual Growth Rate. Nifty 50 has given a return of 12.2% annually since its inception. Moreover, Nifty next 50 has given a return of 17.7% annually, since its inception. In contrast, bitcoin gave a return of 18% p.a. annually since its inception.
Risk:
All investments are subject to risk; the stock market or bitcoins, neither is immune. The question is the degree of risk. The standard deviation of returns is one of the measures to assess the risk of an investment. The standard deviation for Sensex is 21.03 and whereas Nifty 50’s is 23.62. The individual stock-specific risk may be high.
In contrast, the standard deviation of Bitcoin since 2009 has been more than 200% or at least 10 times that of normal stock indices. Bitcoin is highly volatile and speculative, and the range of fluctuation is also very wide.
Supply and Market:
The supply of equities is unlimited and equity markets are perpetual, whereas Bitcoin may be replaced by another cryptocurrency or come under regulation. The supply of Bitcoins is limited with a limited number of buyers and sellers in the market.
In contrast, there are a large number of institutions both foreign and domestic, pension funds and retail investors that invest in equity markets. Bitcoin and other cryptocurrencies are nascent and have a long way to go.
Keeping in mind all the above factors, how can you decide which is a better investment, stocks or bitcoin?
- First, you need to determine your return requirement and propensity to assume risk.
- To develop a balanced portfolio, you should diversify among different asset classes like stocks, bonds, precious metals, real estate etc.
- Stocks should form an integral part of your portfolio since they achieve the objective of wealth maximisation with optimal risk. The risk-adjusted returns of stocks is higher than any other asset class.
- You can easily invest in stocks by opening an online trading account. Many reputed online brokers provide a trading platform that you can easily access to get exposure to the Sensex 30, Nifty 50 or other equities.
- If your propensity to assume risk is high, you may make a very small allocation to Bitcoin. You must be mentally prepared to forgo the money in this investment due to its speculative nature and the high standard deviation, as previously mentioned.
Hi there! I’m Sethu, your go-to guy for all things tech, travel, internet, movies, and business tips. I love sharing insights and stories that make life more interesting. Let’s explore the world together, one article at a time!
