Crypto vs Stocks

Intro to Trading Stocks

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Here are ten essential takeaways for trading stocks:

1. Buying a stock means buying a piece of a company. That’s why stocks are also called shares: owning a stock is owning a “share” of a company. If I buy one Apple share, it literally means I own a (tiny) piece of the company Apple.
2. Companies issue stocks to raise capital to finance their business. When a company issues stocks for the first time, it is called an “Initial Public Offering” (IPO).
3. A stock exchange is a centralized body that “lists” companies’ shares for brokers to buy and sell on behalf of their clients. The largest stock exchange in the world is the New York Stock Exchange, (NYSE), with over two thousand different companies’ stocks. Stock exchanges are highly regulated to protect investors and companies participating in them.
4. Some companies pay dividends, which are direct payments from their profits to the stock's owners. I remember my dad getting physical dividend checks from companies whose stocks he owned!
5. Some trading instruments allow trading the price of a stock without physically buying and selling it. For example, CFDs and futures contracts can mirror the stock price but do not involve holding the stock itself. The advantage is trading on leverage and taking short positions, both of which are not always possible when trading the stock directly. The best stock brokers offer a wide selection of individual stocks for trading at competitive fees, overseen by sufficient regulation.
6. Options contracts (i.e., “call” and “put” options) are also a popular method of trading stocks. They allow traders to access leverage, take short positions, and find unique ways to profit from stock price movements. For example, some option strategies allow traders to profit if a stock price stays in a specified range.
7. The primary measure of a stock’s fundamental value is its price-earnings ratio or “PE.” This is the stock’s price divided by the earnings (or profit) that the company generates per share. For example, if Apple’s stock price is $200, and each share represents $10 of the company profit since its last earnings report, the PE ratio is 20. The higher the PE ratio, the more expensive the stock is relative to the company’s profits. Warren Buffet, who is a “value investor,” likes to buy companies with lower PE ratios because he believes he’s buying a company’s stock at a better value.
8. Companies listed on stock exchanges come in many different sizes. Some are small companies with valuations in the tens of millions of dollars. Others are large, well-known companies valued in the hundreds of billions, such as Apple, Amazon, Exxon Mobil, Mastercard, Walmart, Costco, Netflix, Adidas, Honda, Samsung, etc.
9. A popular way to trade stocks is by trading an “index,” which is the combined value of multiple companies’ stocks. The primary index for US stocks is the S&P 500, which represents the combined value of 500 companies in the US stock market. I can buy or sell the S&P 500 as an ETF (which trades as if it is a single share), a futures contract, or a CFD. Other stock market indexes include the UK’s FTSE 100 and Japan’s Nikkei 225. Trading an index reduces the risks associated with single companies—this is known as diversification.
10. Since its inception in 1957, the S&P 500 has produced an average annual return of 10.1%. Because of its long-term track record, broad diversification, and the fact that individuals can easily invest in it through ETFs or other instruments, the S&P 500 has become part of many people’s long-term buy-and-hold portfolios, especially for retirement. Since 2010, I have regularly purchased the S&P 500, which I’ve held since. I’ve watched that part of my portfolio grow in value without the stress of trading in and out of it.

Intro to Trading Crypto

Here are five essential takeaways for understanding cryptocurrency:

1. Cryptocurrencies are purely digital assets without real tangible backing. Although they have the word “currencies” in their name, cryptocurrencies are not traditional currencies backed by central banks or governments. Because they are purely digital, there are fewer objective or recognized ways of assessing their value.
2. The first cryptocurrency was Bitcoin, created in 2009. Today, Bitcoin dominates the cryptocurrency market capitalizations. At the time of writing, Bitcoin’s market capitalization ($1.7 trillion) is six times larger than the second biggest cryptocurrency, Ethereum ($270 bn).
3. Cryptocurrencies trade on exchanges. Some of the largest crypto exchanges are Binance, Coinbase and Kraken. The best crypto CFD brokers offer competitive fees and a good selection of cryptocurrencies.
4. Established exchanges and brokers have started offering cryptocurrency trading instruments. The world's largest futures exchange, the Chicago Mercantile Exchange (CME), offers Bitcoin futures. One of the world’s largest asset managers, BlackRock, offers Bitcoin ETFs. Many CFD brokers offer Bitcoin and other cryptocurrency CFDs.
5. Another way of earning money from cryptocurrencies is by a process called “staking.” This is where the blockchain (the network that runs the cryptocurrency) 'locks up' someone’s cryptocurrencies to support its operations. The blockchain then rewards the cryptocurrency owners with additional tokens. Note that only cryptocurrencies with a “Proof-of-Stake” (PoS) structure allow for staking. This excludes Bitcoin because it has a “Proof of Work” (PoW) structure that does not allow for staking.

Stocks & Cryptocurrencies—Main Similarities & Differences

1. Purpose. Stock markets have an objective function in capitalism and global economies: they allow companies to raise capital and individuals to invest in those companies. These purposes are indisputable and globally recognized. In contrast, cryptocurrencies have yet to establish functions recognized objectively by society.
2. Size. The value of global stock markets is estimated to be over $100 trillion, whereas cryptocurrencies’ combined value is approximately $2.5 trillion, a small fraction of the capitalisation of global stocks.
3. Regulation. Stock exchanges are some of the world's most highly regulated financial institutions. In contrast, cryptocurrency exchanges are more lightly regulated, although some countries have taken steps to ensure investor protection. However, there have been awful lapses by crypto exchanges—hacking by third parties or the exchanges themselves stealing client assets—that would never happen at stock exchanges.
4. Number of stocks and indexes versus cryptocurrencies. There are a little less than 50,000 publicly listed stocks worldwide, compared to about 10,000 different cryptocurrencies. Many of these cryptocurrencies are extremely illiquid, so the true number of tradable cryptos is much less.
5. Volatility. The largest cryptocurrency, Bitcoin, representing more than half the total market cap of all cryptocurrencies, has been 3.7 times more volatile than the S&P 500 in the four years up to February 2024. For example, not unusual to see 10-20% swings in Bitcoin prices in a matter of days, but that’s much rarer in the S&P 500.
6. Long-term track record. The S&P 500 has an almost seventy-year track record, while Bitcoin’s is a mere fifteen years. The advantage of a long-term track record is that traders know how the asset class behaves—what economic conditions drive its price, how long it takes to recover from drawdowns, etc.
7. Trading hours. Most stocks trade five days a week during business hours, whereas cryptocurrencies trade 24/7.

Trading in Stocks—Pros & Cons

Pros

1. The large number of stocks available to trade. This is my favourite reason not to overlook stocks. This breadth of choice allows traders to filter for different characteristics: smaller market cap stocks, hot industries, such as AI or biotech, higher volatility stocks, clear trends or support and resistance levels, etc. This means that traders can pick the best opportunities. When I began my trading career in the 2000s, I scanned hundreds of stocks weekly for chart patterns. It took time, but I attribute my early success to seeing so many great opportunities.
2. The ability to trade equity indexes (e.g., S&P 500, Nasdaq 100, etc.) reduces company-specific risk. I can worry less about the impact when an individual company gets hit by news that changes its dynamic.
3. Well-known forces drive stock prices. For example, I will know in advance the dates of earnings releases for any stocks I trade or the macroeconomic announcements that affect equity indexes. If necessary, I can time my trades to avoid these or use that knowledge to understand when the next trend might start.
4. Stock markets, especially the S&P 500, have long track records that can make them part of a long-term portfolio.

Cons

1. Getting leverage is not always possible. Without adequate leverage, I may need a larger account size.
2. Going short on some stocks is not always possible. I have had frustrating moments seeing perfect bearish set-ups on certain stocks but being unable to execute a short position on them.
3. Monitoring lots of stocks and knowing their characteristics can be time-consuming.

Trading in Crypto—Pros & Cons

Pros

1. Crypto’s higher volatility gives it much more profit potential.
2. There are now better regulated and less costly ways to trade cryptocurrencies, such as ETFs, CFDs, and CME options contracts.
3. Cryptocurrencies can be highly uncorrelated to other markets. I often find good crypto trade setups when equity indexes do not present me with any.

Cons

1. Volatility is a double-edged sword, and it increases the loss potential, too.
2. Cryptocurrency volatility varies a lot. There are periods when crypto volatility is less than stock market volatility. This uncertainty makes it challenging to plan trading strategies.
3. There are much fewer cryptocurrencies than stocks. Fewer opportunities will mean waiting longer to take ideal trading setups.
4. Predicting what will move cryptocurrency prices is complicated as they are not tangible assets with intrinsic value. Avoiding unexpected sentiment changes in crypto is particularly challenging.

Additional Factors to Consider When Choosing Between Stocks or Crypto (H2)

1. Time horizon. Cryptocurrencies have no long-term track record. If I were a buy-and-hold investor, I would steer towards equity indexes, particularly the S&P 500.
2. Consider trading costs. If I make multiple trades a day, I will incur more spreads and commissions, and trading some smaller cryptocurrencies may be too costly.
3. Comfort factor. Ultimately, I must be comfortable with whichever trading instruments and asset classes I choose. This could be based on experience or my ability to handle volatility.

My Take

Cryptocurrencies and stocks could not be more different. Cryptocurrencies are new, purely digital, have no long-term track record, and are three to four times more volatility than stocks. Stocks are the opposite of these characteristics: they have intrinsic value because they represent owning a company, and many equity indexes have multi-decade track records (the S&P 500 has produced an annualized 10.1% gain over almost seventy years). Cryptocurrencies’ high volatility gives more profit potential, but it is a double-edged sword and can lead to quicker losses. The sheer number of liquid stocks compared to tradable cryptocurrencies is a huge advantage because I can often find stocks with perfect trading setups, although monitoring more stocks is time-consuming. I love the opportunity that crypto provides, but I would not overlook stocks to solely trade crypto because I know the stock market’s characteristics won’t change for years, and my skills will always be valid with stocks.