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Which is the best investment for your portfolio

Bitcoin vs Stock: Which is the best investment for your portfolio
Bitcoin vs Stock: Which is the best investment for your portfolio

Stashing your funds into different investment vehicles may seem smart, but analyzing the risk involved in each investment is equally important. Investment professionals are of the opinion that diversifying your investment portfolio does not guarantee against loss, but it is surely an ideal way to achieve your long-time financial goals. With a good understanding of how investment portfolios work, an investor has control over his financial assets and can maximize his investment returns.  

This article explains the history, statistics of Stock and Bitcoin while comparing both in terms of Price, Risk, Volatility and Difference in Capital Gains

History and Statistics of Stock 

The stock market arguably is one of the most popular and often discussed investment vehicles which offers several opportunities for investors to pursue a gainful yield on their investment. In 2020 the global stock market was capped at $80 trillion, on the average it performed poorly in September though a bear market which started in February and ended April 2020. 

In 2008 and 2020 particularly many investors lost hard-earned money during the market crash, these events had led millions of investors to lose the trust they have in the stock market.  During the course of writing this article, we questioned 100 random persons all of whom had either invested in the Nigerian stock exchange in the past or currently have active investments in the stock market. 

Based on the response from our questionnaires 47 per cent had little trust in the Nigerian stock market as a viable investment, mostly due to unpleasant stock performances, slow appreciation of their stock investment or low dividend payout.

38 per cent of respondents invested in the stock market because they were unaware of suitable alternative investments to stocks, while 53 per cent of respondents were satisfied with their stock investments, mostly due to a predetermined part of the savings, rather than all of it on stocks and were optimistic about the market performance in the long term.

History and Statistics of Bitcoin

Bitcoin, on the other hand, is a new development and the world’s most popular cryptocurrency which is designed for a user to peer to a network without the need for intermediaries. In 2021, the total global cryptocurrencies market was capped at $1 trillion. The digital coin(bitcoin) had more than quadrupled in value accounting for $717,893,611,191 billion market after a recent price explosion of $40,000.

Today, it has surpassed Facebook’s market cap and forging ahead of the likes of Visa and Alibaba. With this said one won’t deny the fact that this market has its potential. Millions of people are beginning to ask whether to add bitcoin as an alternative investment. Well if your answer is yes, read up and understand the market before jumping on board.

Comparing Stock and Bitcoin 

Stock market investment is driven by long- term prospects. This explains why some experienced stock investors tend to have confidence that their long term investment in Stock will perform well in the long run once investment companies get back on track. Unlike Bitcoin, a more speculative market with a fluctuating price that frightens traders to panic-sell at the fall of its price.

Volatility defines both markets, while Stock is less volatile, bitcoin’s volatility tends to be higher. The Black Thursday in 2020 known as a day bitcoin crashed by more than 30 per cent and the 2020 Coronavirus stock market crash which recorded a 34 per cent decline all points to the fact that both markets can be affected by a negative economic performance.

No Difference in Capital Gains

There is tax liability in both Stock and Bitcoin capital gains or losses.  If a bitcoin trader holds bitcoin as an investment they are subject to capital gain taxes similar to other forms of security such as stocks and bonds. Whether you earn bitcoin from mining, spend it on goods and services or trade it for another currency the value is taxable upon completion of any transaction regardless of its capital gains or losses. 

Bitcoin has a significant edge over Stock because it is treated as property, not a currency and not subject to the wash sale rule of Stocks and securities, When it comes to tax-loss harvesting, Bitcoin allows a trader to harvest tax losses by selling his investment more frequently every time it goes in the red.  With Stock, when the market value is less than what you invested you cannot lay claims on losses according to the wash sale rule which prohibits an investor to lay claims on tax losses.

Stock Risk vs Bitcoin Risk

The fear of boom and bust often affect digital currencies, stocks and other investment products, though each investment has its unique and varied risks.  If you are looking to invest in Bitcoin you have a high risk of losing your capital because the price could drop precipitously and a single online hacking or crashed hard drive incident can wipe out your entire bitcoin with no recourse. Bitcoin has hit an all-time price surge which was followed by other crashes but has consistently retained a significant portion of its previous gains every time it plummets. 

For stock, one of the biggest risks with stock is the rising and falling interest rates. A rising interest rate hurts the value of stocks, which explains why some companies carry a large amount of debt. In the long run, the profitability of the company will be reduced and the stock value drops too.

Unlike Bitcoin, stock is regulated with a strong anti-fraud parameter which monitors the activities of buyers and sellers. Over time, stock tends to rise in value which in turn benefits investors who are willing to grow their funds over a long period.

{Warning: Investing in stock is risky, buying individual stocks is even riskier, a company’s performance usually dictates how much the stock returns. The stock market could soar, plummet or rebound.}

How Is Bitcoin vs Stock Prices Determined?

Just like every other asset the law of supply and demand determines its worth. At the most fundamental level, the stock price is a  function of the supply of shares that is readily available and the need amongst investors for such shares, while the supply and demand of a company’s shares are the most important factor that affects the value of its earnings

“When a company issues shares and more investors show interest to buy the stock(demand) than sell it( supply) then the prices automatically go up. the moment a company buys back its shares, it will reduce the total number of shares available for trading. On the demand side, If the same company buys back its shares, the total number of shares available for trading will reduce. On the side of demand, if the demand for a company’s shares is high, the price will automatically increase because the higher the demand the higher the price investors are willing to pay. conversely,  if the numbers of sellers increase, the price of such shares will be driven down”.

The law of demand and supply does affect the price of Bitcoin as well. When demand is high the supply of bitcoin will be less and as such the price automatically increases vice versa. For bitcoin, its maximum supply is 21 million coins. Roughly every 4 years there is what is called a BTC halving which halves the mining reward for miners, this event limits the supply of new coins, so prices could rise if demand remains strong.  

In conclusion, I believe trading bitcoin is better than investing in stocks. Though bitcoin is relatively new, it will continue to grow and evolve just like other technological development. Today the average price of a single bitcoin is approximately $40,000 as against its initial value of $20,000 in 2017. What other investment assets have experienced such a meteoric explosion in value in a space of three years. 

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