Stocks vs. Crypto: Which Is Better?

After watching financial markets for 10 years, I often feel like it’s just like going to the gym to lose weight.

When you meet a friend who has been working out hard, when you go on a long-awaited trip and don’t like how you look in the photos, or when a shirt you always wore suddenly feels tight…

“I really should have worked out.” That thought flashes through your mind.

Likewise, when you see a particular stock mentioned on the news, when a friend in a group chat brags about their realized gains, or when everyone from junior staff to senior managers talks about stocks at a company dinner…

“I really should have bought some stocks.” That thought flashes through your mind.

What’s truly surprising is that the very people who need to act don’t actually do anything when the opportunity comes. In a way, that might be the most natural outcome.

You tell yourself, “My weight is probably fine as it is,” or “There’s still plenty of time before the next trip.” The problem is, you end up forgetting about it.

I should have done this, I should have done that,

The neologism “kkeol-moo-sae” — a blend of the Korean regret particle “kkeol” and “parrot” — refers to people like this who keep repeating their regrets.

A massive trend seems to be approaching, it feels like there may never be another chance, and you want to stop being a “kkeol-moo-sae,” so you somehow muster up the courage and make up your mind — only to find there suddenly seems to be so much to study.

Which exchange has the lowest fees, which asset you should buy, how to analyze companies…

When you make hasty decisions with a sense of urgency, you’re very likely to get hurt.

Today, I’d like to write a few words for those who feel extremely pressed for time — even though, in fact, they shouldn’t be rushing at all.

If you have some experience, you might respond to this question by thinking, “Isn’t crypto kind of out of favor these days?”

That’s right. The peak of the rally is already behind us, and in the meantime, AI-related companies have been soaring and drawing attention. Even so, because the cryptocurrency market has firmly established itself as the icon of “skyrocketing gains,” anyone just starting to invest or considering expanding their portfolio is likely to wonder whether they should give it a try.

In fact, global interest has risen on average, and in Korea it is still a topic you often overhear on public transportation, in cafés, and at social gatherings. If you are wondering whether “Korea is uniquely obsessed with cryptocurrencies,” the countries with the highest search volume for Bitcoin worldwide are Nigeria and El Salvador.

Yes. It is an interesting point, and since we will come back to it later, let’s briefly touch on it here.

According to Statista, Nigeria has the third-largest cryptocurrency trading volume in the world, after the United States and Russia.

This is not about chasing a fad. Nigeria has a more unfortunate backdrop.

Nigeria is a well-known oil producer, but because it lacks refining facilities, it exports most of its crude oil and imports refined fuel.

At the same time, because household incomes are low, the country has been collecting a portion of crude export revenues from the state-owned oil company and using it to fund fuel subsidies. According to the Korea Institute for International Economic Policy, the share of crude export revenues that Nigeria’s national oil company provided to the central government rose from 4% to 45% in 2021 and 83% in 2022.

Because Nigeria spends more on fuel subsidies than on health care, education, and defense combined, the World Bank and other experts have criticized this policy and argued that the country should instead focus on building infrastructure and supporting long-term economic growth.

Subsidies on diesel were abolished in 2003 and on kerosene in 2016, but the removal of gasoline subsidies had been repeatedly delayed due to concerns about higher fuel prices and voter backlash.

On May 29, 2023, in his inauguration speech, President Tinubu, who had just taken office, raised the issue of eliminating fuel subsidies and went on to abolish them. His message was that, unlike his predecessors, he had the courage to tackle the issue head-on without hesitation.

Even though there had already been a case in 2012 where an attempt to scrap subsidies caused gasoline prices to double, the fiscal burden of subsidies had grown so heavy that Nigeria’s public finances were under threat, leaving the government with little choice.

The heavier fuel burden caused by the removal of subsidies pushed up transportation and production costs, and that burden eventually fed through into prices. The result was a sharp deterioration in inflation.

In summary, because Nigeria lacks drilling infrastructure, it faces a binary choice at the national level: either “take on more debt” or “accept higher inflation.” Nigeria chose inflation.

Inflation—rising prices—means the value of the currency is falling in relative terms. A currency that keeps losing value inevitably loses the trust of its people. This is why Nigerians have been abandoning their own currency, the naira, and turning their attention to Bitcoin.

For any country, news that Bitcoin is becoming the primary store of value for its citizens is hardly welcome. It weakens the effectiveness of monetary policy and can trigger additional currency depreciation as dollars flow out of the country.

The Nigerian authorities have:

On February 22, according to Bloomberg, asked cryptocurrency trading platforms to block access for Nigerian users.

On February 29, according to the Financial Times, detained two Binance executives (Tigran Gambaryan and Nadeem Anjarwalla) in Nigeria.
On March 12, according to the Financial Times, demanded that Binance hand over the names and trading records of its top 100 Nigerian users by volume.

On May 8, according to Reuters, announced plans to tighten regulations on cryptocurrencies.

Nadeem Anjarwalla, who had been detained in Nigeria, claimed on March 28 that Nigerian government agencies violated his fundamental rights by detaining him and seizing his passport. However, on June 19 the Nigerian High Court put his lawsuit on hold and ultimately dismissed the case, according to local media reports that day.

In short, Nigeria is locked in a fierce struggle with cryptocurrencies.

While some countries, like Nigeria, have resisted allowing Bitcoin to take root domestically, others have embraced it. One such country is El Salvador.

In 2001, El Salvador abolished its own currency and adopted the US dollar as legal tender due to severe inflation. That decision proved highly successful. Annual inflation, which had exceeded 10% from 1977 to 1995, fell sharply, staying below 2% after 2012 and hovering close to 0% from 2015 onward.

However, abandoning a national currency and adopting the dollar comes with a cost: the loss of monetary independence. In other words, El Salvador becomes subject to US monetary policy.

Against this backdrop, President Nayib Bukele of El Salvador introduced Bitcoin as legal tender in September 2021. His aim was to gain greater independence from the United States, cut the cost of cross-border remittances, and ride the wave of technological progress by turning the country into a cryptocurrency hub.

Bitcoin’s price has surged recently, and as a result President Bukele has appeared emboldened. He may also no longer be directly subject to U.S. monetary policy.

The problem is that this still does not amount to full independence.

It is difficult to restrict trading among cryptocurrencies, and there are countless combinations. In the mid-19th century, roughly 8,000 private currencies were issued in the United States, but that period was notorious for instability and inefficiency. This is essentially why central banks were created.

The logic that a proliferation of currencies within a country causes problems also applies internationally. This is one reason the dollar remains the dominant global currency. The world economy cannot function with 11,000 different international currencies.

If U.S. fiscal and current-account deficits had put sustained, heavy downward pressure on the dollar’s value, people might have turned away from it in search of alternatives. But that has not happened, especially during the period when cryptocurrencies have been around.

Yet President Bukele has brushed aside these concerns. On March 15, he announced that he would move $406 million worth of cryptocurrency into a cold wallet (an offline storage device) and store it in a physical vault. This is effectively the entirety of the bitcoin holdings El Salvador has disclosed. It signals an intention not to sell a single coin.

But here is the question: when El Salvador imports oil — one of its key imports — from the United States, how do you think Washington will react if San Salvador says, “We’ll pay in bitcoin”?

Even if El Salvador alone designates bitcoin as legal tender, the rest of the world still uses dollars. El Salvador knows it needs dollars. That is why it is trying to raise cash by issuing tokenized bonds, and why the IMF — with which it is negotiating a large loan because its cash reserves are insufficient — has criticized these moves.

El Salvador’s imports totaled $16.3 billion in 2022, and oil alone, which accounts for 11.5 percent, came to $1.87 billion. How much bitcoin does the country actually hold? Not even a quarter of that.
Even if bitcoin prices fall, El Salvador will not collapse overnight, because its trade is not structurally denominated in bitcoin. If push comes to shove, it can always abandon bitcoin and move on to a new legal tender.

The reason El Salvador’s bitcoin holdings draw so much attention, despite not being alarmingly large, is simply that it was the first country to adopt bitcoin as legal tender and is pursuing an experimental path to grow the industry around it.

The reason we have focused on Nigeria and El Salvador — the two countries most interested in bitcoin — is that their cases highlight the instability of cryptocurrencies.

Nigeria has seen its citizens turn to bitcoin as their currency loses value, yet the government is trying to exclude bitcoin in order to defend the value of the naira. El Salvador, meanwhile, designated bitcoin as legal tender in pursuit of reform, but the numbers behind the scenes reveal far less confidence than its bold rhetoric suggests.

To assess stability, it is crucial to understand how many people hold the asset, to what extent their collective agreement can minimize nominal losses, and how strongly they believe such agreement can be reached. In the two countries we looked at earlier that show high interest in Bitcoin, it is hard to interpret the situation as evidence of this kind of trust.

No matter how the world turns, the rise of Bitcoin is irresistibly attractive.

Many of us probably have a little parrot in our heads that keeps saying, “If only I had bought it 10 years ago…”

Even so, the reason we hesitate at the crossroads as investors is ultimately the fear that we might be buying at the top.

If you mistime it and get stuck after buying at the top, the pain can be indescribable. Even if you eventually break even, the gap between you and those who put their money into other assets may have widened significantly.

What we really want is something that rises when markets rise, but falls less when they go down, isn’t it?

If we focus purely on safety, the safest asset is cash. Even gold, which is widely perceived as a safe asset, tends to fall sharply when markets collapse. From this perspective, the concept of safety is ultimately relative.

So if you are torn between stocks and coins, it is only natural to compare the two directly.

That is exactly what we have prepared here.

In people’s minds, coins are already classified as risky assets, and the examples of Nigeria and El Salvador suggest that Bitcoin still has a long way to go. But we can only make up our minds once we have looked squarely at the numbers.

Which side offers higher expected returns relative to risk? To answer this, we will borrow some ideas from fund performance metrics.

#1. Sharpe ratio

The Sharpe ratio is a performance metric that divides returns by risk. Here, risk is defined as standard deviation, which in simple terms shows how strong the returns were relative to volatility. If there are two funds with the same return, investors will naturally prefer the one that generated that return more steadily.

#2. Sortino ratio

However, it would be unfair if an asset’s price simply shot up over a short period, inflating volatility for no good reason. We are not trying to compare two assets with the same return; we want to see which of two markets with different returns offers better potential relative to risk. The Sortino ratio only considers downside risk. It uses the standard deviation of negative returns only, and therefore does not treat upside volatility as risk.

These are the Sharpe and Sortino ratios of the S&P 500, Nasdaq, and Bitcoin measured from January 2014 to June 2024.

Because the sole purpose here is comparison, I did not subtract the risk-free rate, which should normally be deducted when evaluating fund performance.

You might argue that comparing the S&P 500, whose constituents change over time, with a single asset like Bitcoin is not appropriate. However, Bitcoin accounts for more than 50% of the total cryptocurrency market, and its correlation with CoinDesk’s market index, which is calculated based on dominance, is very high. For these reasons, I chose to compare it with Bitcoin. (See images below)

The result: over roughly 10 years, the Nasdaq delivered the best risk-adjusted return, while Bitcoin, despite its massive price appreciation, showed the weakest performance, as expected. Even when we look only at downside volatility, the Sortino ratio for Bitcoin was the lowest. In other words, when markets turn sour, Bitcoin tends to fall very sharply, meaning it is even riskier than we might imagine.

In conclusion, Bitcoin turned out to be riskier than stocks. But even when you compare using these kinds of metrics, what ultimately matters is the point in time from which you start measuring, and that is something you are likely already well aware of.

So if you are optimistic about cryptocurrencies and the underlying technology, no matter how loudly someone shouts that they are dangerous, wouldn’t your finger still be hovering over the buy button?

I also have something to say to people like this. If you want to buy blindly without asking questions, here is what you must check first:

#1. Check the dominance trend

An increasing market share means that money within the crypto market is flowing into that particular asset. If your basic assumption is the growth of the cryptocurrency market, then it is only rational to position yourself where the money is actually flowing.

#2. Read the white paper

If the coin is not a major one, so that tracking its dominance trend is meaningless, and you only want to assess its technology and growth potential, then you need to read the white paper. As an investor, you must understand what kind of technology and structure it uses, what kind of progress it aims for, and whether those goals are realistically achievable. For example, if the stated goal is “to give every coin holder 10,000 won every day,” you need to ask where that money is supposed to come from and whether the structure is sustainable. Because the regulatory bar is relatively low in the crypto market, there are far too many Ponzi schemes that resemble multi-level marketing. These schemes can vanish almost overnight.

Fun reads to go with this piece

The dot-com bubble all over again: how weak companies collapse and a stronger market emerges

The mortgage crisis of the crypto world: fully understanding the collapse of Luna (LUNA) and Terra (UST)

If you are someone who finds stocks more attractive than cryptocurrencies, today is a day when I want to ask: what is still holding you back from subscribing?