Singaporeans have long been known to embrace the 5Cs, namely cash, car, condo, credit card, and country club.
In recent years, the appeal of the fifth C, the country club, has waned.
This longing has now been replaced by cryptocurrency, an exciting “C” that’s been all the rage in the past few years.
Cryptocurrencies are the hot new investment trend that’s been hogging the headlines and luring thousands of newbies to pump money in.
For crypto enthusiasts, stocks seem old-fashioned and boring by comparison.
But the question is: are cryptocurrencies right for you?
Or should you play it safe by parking your money in stocks?
Blockchain and cryptocurrencies
The popularity of cryptocurrencies can be traced back to the development of Bitcoin and its underlying blockchain protocol.
In a nutshell, blockchain is a distributed ledger used to store and track information and transactions, relying on a decentralised consensus to verify the information added.
Cryptocurrencies such as Bitcoin and Ethereum make use of blockchain protocols to verify transactions between buyers and sellers, thus eliminating any centralised authority.
This approach allows cryptocurrencies to be transacted and used for payments just like fiat money (i.e. currencies such as the US dollar or Singapore dollar).
Rapid rise
The appeal of cryptocurrencies is partly tied to their rapid surge in price.
Bitcoin has more than tripled in value from US$18,700 to US$59,000 in just one year, while Ethereum has jumped nearly eight-fold from US$552 to US$4,370 over the same period.
Most stocks, on the other hand, have not enjoyed such stellar price gains over the same period.
Because of this, stocks are perceived as being “boring” or “old-school”.
Risks abound
But what many investors may not know about cryptocurrencies is that many of these currencies are not tethered to any physical or digital asset.
In short, the price of Bitcoin is whatever another person is willing to transact it for.
In contrast, the value of each stock is tied to the health of its underlying business.
Stocks that do well over time have a strong, growing business that’s generating healthy profits and cash flows.
The value of stocks has an anchor, whereas cryptocurrencies cannot provide the same assurance and relies on the mass acceptance of the currency.
As a result, the price of cryptocurrencies can be very volatile as they are influenced by political moves, regulatory news, and even tweets from Tesla (NASDAQ: TSLA) billionaire Elon Musk.
Investors need to be aware of these risks and volatility before they decide to take up a position in any cryptocurrency.
Digital exchanges
That said, cryptocurrencies are gradually gaining legitimacy, albeit on a controlled scale.
Singapore’s Monetary Authority of Singapore (MAS) chairman Tharman Shanmugaratnam was quoted as saying that cryptocurrencies have a place in Singapore’s financial sector if they are properly regulated.
MAS managing director Ravi Menon has also chimed in by saying that the country is not looking to clamp down or ban cryptocurrencies, as Singapore intends to become a leading player in the global crypto economy.
Meanwhile, Singapore’s financial institutions are making their own moves.
DBS Group (SGX: D05), Singapore’s largest bank, set up a digital exchange last year to provide end-to-end solutions across the digital asset value chain.
It would be an understatement to say that demand has shot through the roof.
As of end-October, DBS’ digital exchange had over S$600 million in digital assets under custody, triple the amount recorded just a month earlier.
The exchange had gone 24/7 back in August and trading volumes in just the last two months have exceeded the volumes for the first eight months of 2021 by 40%.
OCBC Ltd (SGX: O39) also recently announced its intention to join the fray.
CEO Helen Wong was recently quoted as saying that the lender is considering whether to set up a crypto exchange but that the bank “won’t rush into the sector just because of its popularity”.
The right stocks for the long run
If you had purchased the right stocks and held them over the long term, you’d also be sitting on a tidy pile of profits.
Stocks have not lost out to cryptocurrencies although the latter has seen a sharp price gain in a relatively short period.
Take Apple (NASDAQ: AAPL) as an example.
The iPhone and iPad manufacturer has seen its stock price rise from US$13 back in November 2011 to its current US$160.55.
That’s an impressive 12-fold gain in 10 years.
Streaming TV behemoth Netflix (NASDAQ: NFLX) was trading at just US$9 a decade ago but its stock has since risen by a stunning 75-fold to US$678.
The key, of course, is in choosing the right businesses to help you to compound your wealth.
Get Smart: Know what you are buying
Cryptocurrency is certainly an exciting asset class.
Although it may not be backed by any government and is viewed as being risky, there’s no denying that it has a place in society if it is well-regulated.
Investors who are looking to diversify their portfolios can consider buying crypto, but they need to understand the risks and the nature of what they are getting into.
Stocks can also offer stellar long term returns if the right ones are selected and held.
One advantage of owning stocks is that most of them also pay out a dividend, so the investor can enjoy passive income while waiting for price appreciation.
In short, whether you intend to invest in cryptocurrencies, stocks or whatever viable investment for that matter, make sure you are aware of the pros and cons of each asset class.
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Disclaimer: Royston Yang owns shares of Apple and DBS Group.
