Cryptocurrencies have emerged as an attractive investment option in recent years. Veteran crypto trader Glenn Goodman calls the rise of virtual currency a “once-in-a-generation” investor opportunity, adding that people should “grab it with both hands.” He, however, also warns that just like the rewards, the risks are also greater.
A majority of investors are usually risk-averse in their investments. They prefer to invest in investment options that give them maximum profits at zero or minimal loss. For them, traditional financial instruments are a no-loss, safe investment, while cryptocurrencies are a big fraud.
However, lately, the investors have begun to flock the digital currency market, shedding their initial scorn. In a recent study done by Grayscale Investments and Q8 Research, 40 percent of the respondents out of the 1,100 U.S.-based investors polled showed interest in owning Bitcoin.
Here is a comparison of cryptocurrency (Bitcoin) and traditional financial instruments (shares and bonds) to understand their pros and cons.
Stocks, Bonds vs. Bitcoin
Bonds are like a fixed-income loan that an investor gives to a company or the government; whereas investing in stocks provides investors with shares in a public-traded company. When investors invest in Bitcoin, they become owners of virtual coins, which are free of central bank control. Unlike the peer-to-peer transaction of digital coins, there are regulatory authorities that oversee the investment in stocks and bonds.
Investors can sell their bitcoins to a third-party for cash or for an equivalent value in goods or services. Bonds can be redeemed at the time of maturity, with the investor receiving the par value of the security. And in the case of shares, the investors can sell or transfer their shares; what they gain or lose depends on the market.
Volatile Asset Class
Both bitcoins and shares come under volatile asset class as the variance in their respective markets determine their value. Bonds are relatively stable assets, and as a result, they tend to earn lower returns.
For some investors, bitcoins are more volatile than shares, as the digital currency market is still developing. There are also no regulatory authorities to regulate cryptocurrency exchanges. Stock markets, on the other hand, are well-established financial institutions that are controlled by regulatory authorities.
But in a few years when the cryptocurrency market matures, the volatility of the bitcoin might be less than the shares of the companies trading on stock exchanges. In October of 2018, Cboe Global Market noted that the 20-day historical volatility of bitcoin had fallen to 31.5 percent, below that of Amazon.com (35 percent), Netflix (52 percent), and Nvidia Corp (40 percent). It also observed that the bitcoin’s price was as stable as Apple stock.
Return on Investment
The interests earned on bonds are very low. But, these risk-off assets usually outperform equities when markets go awry. However, when the market is bullish, investors can earn a great return on their investment. The bitcoin can give its investor a whopping “2000 percent yearly return.” Loses are equally big if the market is going through a dramatic up and down.
