A beginner should trade both stock and crypto. Stock should be traded for cash flow and for compounding returns. Crypto should be bought and held as a long-term investment. Crypto still has many unresolved issues regarding security, tax and asset classification. Beginners should invest in Crypto so they don’t miss out, but they should avoid active trading until the tax and other regulatory issues get resolved.
Introduction
The crypto currency explosion of the last 10 years ago has ignited a lot of interest in trading. This is not just limited to trading crypto, it has also ignited interest in trading more traditional asset classes like stock. Many people who have never invested in the market are now stepping up and taking their shot. So, the question: stock or crypto is now one of the most asked questions beginners have.
In this post we are going to examine the pros and cons of crypto and stock. We will then use that discussion to explain why we believe both of these important assets should be part of a beginner’s portfolio.
Table of Contents
- Stocks vs. Crypto
- Crypto pros
- Crypto cons
- Crypto: Our view
- Stocks Pros
- Stocks Cons
- Stocks: Our view
- Conclusion
| Stocks | Crypto | |
| Liquid | Yes | Somewhat |
| Large Upside Potential | Some | Yes |
| Ease of use | High | Low |
| Security Risk | Low | high |
| Regulation Risk | Low | High |
| Political Risk | Low | High |
| Scam Risk | Low | High |
Stocks vs Crypto
Whenever I am asked the question “should I trade stocks or crypto” my answer is an emphatic “do both”. There should be room for many asset classes in your portfolio. Historically investors have always put their money into different types assets for diversification.
Obviously, cryptocurrency is the new kid on the block. I believe that crypto should be bought for the long term and stocks should be used for short term investing and compounding gains.
So, Let’s go through the pros and cons of each so you can understand why I feel that way.
“Historically investors have always put their money into different types assets for diversification”
| Crypto’s Pro’s Potential to make large amounts of money in short time frame Trading crypto is “cool” Staking is the new dividend play The concept of Fractionality |
The pros of trading crypto is that there is potential that you can make astronomical gains with small amounts of money and get rich in a very short period of time. In the current environment crypto is like the wild west. One day a coin could be going for .05 cents and a month later it could be $2 to $3. A coin doesn’t even have to have any true purpose or do anything to become a huge home run and make you a lot of money.
The second pro of trading crypto is that it is Cool. While many people may think that there is no room for social studies in an investing article, I beg to differ. We cannot ignore this very important reason some people are getting involved in crypto. Suffice it to say that it is cool and hip and if that is what drives you to start your investing journey, I say so be it.
Another of the features of the new crypto world is staking. Staking is the new dividend play. Staking is a complex subject and well beyond the scope of this post to explain. Let’s just say that you can stake your coins to a pool and for that they award you payments like “interest” in the form of coins. The ROI on some of these coins is enormous. Anyone that is buying crypto for the long haul should be investigating staking.
The last pro of crypto is the concept of fractionality. With crypto you don’t have to purchase a whole coin. You are allowed to purchase fractions of a coin. When bitcoin is trading at $60K not many new investors can afford to jump in and buy one. That is not a problem with crypto. You can simply say I want to buy $100 worth of bitcoin. You are allowed to purchase a fractional percentage of the coin that $100 represents and the amount you want to invest. This is a huge benefit especially to new investors.
| Crypto’s Cons Considered a very risky asset class Market risk (market is young and underdeveloped) Security Risk Regulatory Risk Crypto: Our View |
Crypto is considered one of the riskiest asset classes of all investments. This is because unlike stocks, crypto have multiple levels of risk that are all important to be aware of as follows:
Market risk
This is just the general risk you assume when you enter any investment. The problem is that with crypto the price swings are so enormous that the risk is classified as extremely high. The same way a crypto can explode upward in value, it can also come down in value.
Security risk
By security risk we mean pure physical risk to your coins and your money. The majority of this risk comes in the form of scams. The crypto world is full of them, so you have to be extremely careful. Right now, there are lots of scams involving crypto because the industry is so young and unregulated. Whether it is some influencer creating a pump and dump with a new coin or someone using click bait to just flat steal your Bitcoin, there are lot of them out there.
Another security risk is that you may send you coins to the wrong address and it may be gone forever.
Security risk also applies to the safety of your security keys. Make sure you keep your keys safe. I can’t tell you how many stories I have read about people losing their keys and having their crypto locked away forever.
“Last but not least, your crypto holdings must be treated like fight club. Number one rule is we never talk about our crypto holdings to anyone.”
To successfully navigate the crypto market, you must pay strict attention to basic security procedures.
Regulatory risk
There is also the risk of regulation and how crypto are going to be classified. How and when are they going to be taxed. Will you have to get licensed if you are doing certain things in the industry?
The government really doesn’t like crypto and will continually increase its pressure on the industry. There is a big debate whether or not crypto are a security or not. The SEC is currently investigating several coins to see if they violated security laws when the launched the coin.
The bottom line is that you have to understand what you are buying. There is an old saying “Caveat Emptor” which means buyer beware. Never was this saying more accurate and applicable than in the crypto world.
Crypto: Our view
We believe in crypto 100% and we recommend that even beginning traders get some. We also believe that they are very risky from a traditional investor’s perspective.
From a practical standpoint, the inexpensive nature of many crypto makes them attractive for long term investing. Hopefully, by the time you want to sell them, much of the uncertainty will be gone.
Only time will tell but it appears that this will eventually be the case. It is just too risky and costly to short term trade crypto.
| Stock’s Pro’s Stocks are user friendly You can start with a small amount of Money You can adapt your trading style to your risk tolerance The information you need to trade stocks is easy to get Highly regulated industry there are not many surprises |
Stocks are very user friendly. The stock market has been around for a long time. The kinks and problems have been worked out and the market is very efficient. This combined with the convenience and power of the internet make stocks very user friendly. Even extremely busy people that cannot get to a computer during the day are able to trade without any additional risks.
You can start with small investment
Two things have made it very easy for beginning investors to enter the market. The first is that most brokerage firms do not have any minimum requirements to open and account. This allows the new investor to start very small.
The second thing is the recent elimination of commissions for retail trades. This means that having successful winning trades is a lot easier for the little guy. All of the commission that was being pocketed by the brokerage firms is now going in the trader’s pocket.
You can adapt your trading style to your risk tolerance
Do you have a very low tolerance for risk? You can trade dividend stocks and get paid similar to a debt instrument like a bond. Looking to take a small amount of money and “swing for the fences”? Then you can find very thinly traded growth stocks that have the potential to explode hundreds of percent. You can tailor your risk tolerance to the stocks you buy and the way you trade. Low risk tolerance is no excuse for not being in the market.
The information you need to trade stocks is very easy to get
The amazing thing about the internet is how much it has opened access to information. In the past you would have to be working at one of the very top investment banks to get access to the information you have today at your fingertips. This access to information has dramatically lowered the barrier to entry to stock trading for most people.
Stock Market is highly regulated
Unlike the crypto market, the stock market is highly regulated. There will be no surprises when it comes to the mechanics and inner working of the market. The elimination of this risk from the stock market makes it extremely attractive to busy people who don’t have the time to do large amounts of due diligence.
| Stock’s Cons Stocks are risky Not going to make you rich overnight Taxes can be high on short term trading |
Stocks are risky
Stocks by their very nature involve risk. The higher risk is why the payoff is so much greater than a fixed rate guaranteed security. The risk can be minimized dramatically, but it is still there, and everyone needs to understand that.
Certain stocks are riskier than others. You must learn your risk tolerance and stay within it. If you do that, then stocks can be a great way to grow and multiply your money.
Stocks not going to make you rich overnight
Don’t get me wrong, some stocks can give you returns that are quite amazing. In this context I am comparing it to crypto where everyone thinks you can get rich overnight. The best plan for growing your money is compounding returns. If you can consistently make 5% in a stock but you can do it 4 times a month your money can grow extremely fast.
Taxes can be high on short term trading
There is an ongoing battle in Washington over capital gains and how they are taxed. This is not intended to give you tax or legal advice. It is only to let you know that the shorter the term you hold a stock and make money, the more tax you will pay on it. This is not going to go away and you need to plan your trading and returns around it.
Stocks: Our view
Stocks are a very practical way to make money and compound money you have earned through your own efforts. Stocks are risky and you can lose money if you don’t know what you are doing. It is incumbent on you to learn as much as you can about trading stocks and practice trading using a trading simulator until you get consistently good.
Conclusion
There is room in any portfolio for both stocks and crypto. It is my belief that crypto, while they can move very quickly in the short term, should only be purchased as a long term buy and hold investments.
There is just too much uncertainty in crypto, yet the potential returns are just too great to ignore. Make stocks the engine of your money machine and put some of your gains into crypto and reap the benefit of long-term appreciation in the coin market.