The price of the world's largest cryptocurrency, Bitcoin (BTC -4.70%), has dropped 37% from its all-time high. As of this writing, it's trading hands at around $41,000 per token. By contrast, the stock market averages aren't down anywhere near that much. The Nasdaq Composite Index is down roughly 4%, and the S&P 500 is down less than 2%. Nevertheless, even though I own Bitcoin personally, in this article I'm going to argue that stocks are the better buy right now.
There are three reasons stocks are a better buy, in my opinion. And some of it has to do with the fundamental differences between stocks and cryptocurrencies.
Image source: Getty Images.
1. High confidence in the future economy
Think about the economic development following innovations like the assembly line, the space program, and the smartphone. Consider that right now, there are smart people planning a colony on Mars, developing quantum computers, and building the world's largest nuclear-fusion plant with the ITER project. And there's a host of other things in development that sound like science fiction today. If I'm making a bet, I'm betting on technological advances like these that take our global economy to heights never seen before.
The global economy doesn't always expand; there are recessions. But I'm optimistic about the long-term future. And stocks represent ownership stakes in real-world businesses. As the economy grows, many companies will capture this upside, growing their revenue streams and rewarding their stakeholders with the profits.
This is how stocks work, and it's why I'm generally picking stocks over cryptocurrencies when presented with a binary choice. I'm confident there will always be good businesses around. Therefore, I enjoy finding them, buying their stocks, and holding them for as long as they're still good businesses.
Image source: Getty Images.
2. Lower confidence in the future of cryptocurrencies
On a small Micronesian island, there's a giant round stone standing 12 feet tall and weighing over 8,000 pounds. To an outsider, it's just a rock. To the island's original people, it's a rai stone -- a locally agreed-upon store of value. The particular rock I'm referencing is just the largest of many used by the inhabitants of the Yap Islands of Micronesia. Some stones are too big to move, but that's OK. For generations, they've kept mental track of financial transactions by exchanging partial or complete rai stones.
From this illustration, we see that currencies have value when we agree they have value. For millennia, humans have agreed gold has value. But if you want to store value in a rai stone, that's also acceptable in parts of Micronesia. In the same way, if you want to use Bitcoin as a store of value, that's becoming an increasingly accepted practice worldwide.
According to a recent study by New York Digital Investment Group, 46 million people in the U.S. now own some Bitcoin. And companies are starting to own some as well, with Tesla being a high-profile example. In short, there's growing consensus that Bitcoin is an acceptable store of value.
But will there still be consensus that Bitcoin is an acceptable store of value in five to ten years? I'm less confident about that than I am about the future of the economy. I own Bitcoin because, in my opinion, its fame gives it the highest chance of achieving widespread acceptance among the cryptocurrencies that exist. But I wouldn't stake my entire financial future on that belief.
Tesla CEO Elon Musk recently called the environmental sustainability of Bitcoin into question. Whether you agree with Musk or not isn't the point. The point is that factors like environmental impact, speed of transactions, or network security could cause people to eventually agree upon a different cryptocurrency as a better store of value. I can't predict how Bitcoin will be perceived in the future.
Image source: Getty Images.
3. Some stocks are down much more than Bitcoin
In the intro, we noted that Bitcoin is down more than the stock market averages, which is true. However, some top stocks are down as much as or even more than Bitcoin, making these good buying opportunities. For example, three of my favorite stocks right now are Airbnb, Peloton Interactive, and Pinterest, down 38%, 40%, and 31%, respectively, from previous highs. In fact, considering how much it's growing internationally, I would put Pinterest very high on a list of stocks to buy on the dip.
But the reality is the choice is not binary -- you can buy both stocks and cryptocurrencies like Bitcoin on the dip. For me, I choose to put the majority of my investing dollars in stocks because I see what these companies are accomplishing in the real world. But I also believe adoption for Bitcoin is still growing, making it worthy of a small, long-term position as well.
