5 reasons why cryptocurrencies make the stock market look good

Once again this week, a bunch of cryptocurrencies, Bitcoin and Ether in particular, hit all-time highs.

Whether it is the fear of inflation, fear of missing out, aversion to fiat currencies or something else, investors are going all-in on alternative currencies.

We have discussed the sector before, but we are going to go out on a limb here and connect cryptocurrencies to equity markets. Bear with us.

Most stock market players worry about cryptocurrencies. “It is a bubble,” they cry out, and maybe it is. “It draws capital from the stock market,” they say, and this is very true, with the market valuation of all cryptos hitting US$3 trillion this week.

But we are going to make a case that cryptos are very good for the stock market. Bubble or not, they make the stock market look good, in many ways. Let's look at five reasons why.

TANGIBLE OWNERSHIP

We might get some pushback on this, since the whole reason behind blockchain accountability is to prove that you actually own the cryptocurrencies you say you do. Prophets will say this is tangible. Maybe, in a bits-andbytes computer-code type of way.

But stocks represent ownership in an actual business. For example, if you own shares in Cineplex Inc., you can sit in a movie theatre that you partially own. If you own shares in Starbucks Corp., a tiny fraction of the profits from your morning latte ends up back in your own pocket.

This is tangible ownership, and stocks look good versus a ledger in the cloud somewhere.

This tangible ownership, of course, gets highlighted every time there is a cryptocurrency scam and tokens disappear for whatever reason, which has happened a lot over the past decade.

CASH

Bubble or not, most cryptocurrency players would agree that one of the reasons for the recent record prices is that there is so much cash sloshing around the financial system. With consumers stuck at home and unable to spend money for two years, and governments throwing money around, all asset prices have risen.

Excess cash also works its way into the stock market, which has had regular all-time highs this year as well. It makes sense that if alternative currencies, which have a very short history, can reach records, then stocks, with 200-plus years of history and performance, should benefit from the excess cash that investors have.

VOLATILITY

Stocks, generally, get discounted by investors because of their volatility. Sometimes stocks go down, so investors want to be paid more for owning them. That's fine. But, if one looks at the volatility of cryptocurrencies, where some can move up or down 50 per cent within 24 hours or even less, it makes the ups and downs of stocks look positively tame by comparison.

If investors — en masse — see stocks as less volatile than other investments, it makes sense that stocks can go higher. Stocks may be risky, but they are not nearly as risky as cryptos.

SCAMS

For this point, we will bring in non-fungible tokens (NFTS) as well as cryptos. In October, there was another scam, with the developers of Evolved Apes taking off with millions of dollars.

Evolved Apes was described as “a collection of 10,000 unique NFTS trapped inside a lawless land.” They are “fighting for survival, only the strongest ape will prevail,” it said, referring to a game that never materialized. Millions were just ... gone.

Now, there have been some scams in the stock market. But the market is, at least, regulated.

You can lose money, sure, but it is extremely rare for you to lose money to outright fraud. Every time you buy a crypto, and, more so, an NFT, you open up the potential to be defrauded. Stocks, in a regulated exchange with brokers, regulators and bankers involved, should be safer and, therefore, worth more in terms of valuations.

VALUE CREATION/ DIVIDENDS

Crypto advocates say one of their advantages is limited supply, at least at an individual token level. This scarcity means buyers need to pay more if they want to accumulate a lot of coins. Fair enough.

But public companies can create actual value, and not just because their stocks go up. Profits accumulate, dividends are paid, employees earn money, suppliers get contracts and wealth is created for all shareholders, not just by flipping one coin to another investor willing to pay more.

Companies can buy back their own shares, pay massive dividends or go private and buy out all their shareholders.

Cryptos and NFTS can do none of these things, and you can only make money if someone else pays more for your coins than you did.

Again, the possibility of dividends, buybacks or takeovers means stocks should be worth more and maybe that's one reason stocks keep going up — they just look better than the alternatives.

Financial Post

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/short Fund may own non-canadian stocks mentioned.)