Comparison of Cryptocurrency with Other Asset Classes

Introduction

Investors are always searching for markets that can offer substantial returns and stable growth. Crypto assets, with their high annual returns, attract investors’ attention and break traditional investment strategies. However, the industry’s ongoing “black swan” events, such as the bankruptcy of hedge fund Three Arrows Capital, the second-largest cryptocurrency exchange FTX, and other platforms, illustrate the substantial risks concealed behind these high returns.

With the Federal Reserve’s interest rate hike, the global economy is encountering challenges. This article will focus on gold and the NASDAQ index, which are viewed as representatives of safe-haven and risk assets, respectively. We will also delve into cryptocurrency and other asset classes like commodities and significant US stock indices. By explaining investment methods, return on investment, and associated risks from a definitional perspective, we aim to help investors gain a more profound understanding of these asset classes.

Overview of Definitions

Cryptocurrency

Cryptocurrency uses a decentralized system, operates on a blockchain network, and employs encryption to record transactions and issuance. Bitcoin, the first cryptocurrency, was introduced in 2009. It has since become a speculative tool, boasting the highest market capitalization of all cryptocurrencies. So far, the cryptocurrency market has experienced four bull-bear cycles, with fluctuations in Bitcoin’s price as an indicator. We are currently in the midst of the fourth cycle. The price of BTC peaked at 69,000 US dollars at the end of 2021 but soon entered a lengthy two-year bear market due to a series of black swan events. In this cycle, the rise of new narratives such as Web3 and AI, compliance, and application have become the main themes of development.

Source: https://www.coingecko.com/en/coins/bitcoin

Gold

Gold has both commodity and currency attributes, with demand including gold jewelry, medical technology, and other consumer sectors, investment demand, and reserves of central banks around the world. With the continuous development of the financial market, gold has been recognized as an investment variety by more and more investors. The main trading venues are the London OTC market, the US futures market, and the Chinese futures market. Gold is one of the most liquid assets in the world, has a high value, and is an independent resource, not limited to any country or trade market, and is not connected with any company or government. “Ounce” is the international unit of measurement for gold, 1 ounce = 28.3495g.

Commodities

Energy commodities are another choice of investment target. They include crude oil, natural gas, petroleum, coal, and assets related to the nuclear energy industry. These products play important roles in transportation, heating, power generation, and daily economic activities. In the commodity business, oil is refined from crude oil; the pricing of these two commodities is closely related, and their price is mainly affected by market supply and demand.

S&P 500 Index

The S&P 500 index is viewed as the prime indicator of the US large-cap market by investors. It comprises the top 500 publicly listed companies in the United States, representing around 80% of the total US market value. Key components include major companies like Apple, Microsoft, and Amazon. Over the past thirty years, the S&P 500 index has generally been on an upward trend. Despite a significant drop due to the pandemic outbreak and the interest rate hike policy in 2022, it has typically rebounded swiftly. The index currently stands at around 5000.

Source: https://www.tradingview.com/chart/?symbol=FRED%3ASP500

NASDAQ

The NASDAQ Composite Index, often known as NASDAQ, is a market value-weighted index containing over 3000 stocks listed on NASDAQ. The majority of its weight comes from tech stocks. As a result, the continuous growth in the market value of tech companies, driven by the internet’s development, has contributed to NASDAQ’s rise. However, a sharp interest rate hike in 2022 caused a significant drop in the valuation of tech stocks, leading to a substantial fall in NASDAQ. In 2023, as the interest rate hike phased out and the AI boom led to a rebound in tech stocks, NASDAQ also rebounded.

Source: https://www.tradingview.com/chart/?symbol=NASDAQ%3ANDAQ

Dow Jones Industrial Average

The Dow Jones Industrial Average is an index that tracks the prices of 30 prominent large companies in the United States after considering their respective weights. The index has a significant representation from the financial sector and includes highly profitable corporations such as Microsoft, Goldman Sachs, and McDonald’s. As it reflects the share prices of these companies, the index value rises with an increase in their stock prices. Its trend is somewhat similar to the S&P 500 index.

Source: https://www.tradingview.com/chart/?symbol=TVC%3ADJI

Investment Methods

There are several methods to invest in cryptocurrencies. The most straightforward approach is to use a cryptocurrency exchange, such as centralized exchanges like Gate.io or decentralized exchanges like Uniswap and Sushiswap, or to buy from brokers. Alternatively, they can invest in cryptocurrency companies or cryptocurrency index funds.

The price of gold is affected by supply and demand, geopolitics, and other factors. There are also different ways to invest in gold, including physical gold, gold ETFs, futures contracts, and Contracts for Difference (CFDs). Gold ETFs are investment funds traded on securities exchanges designed to track the price of gold. Investors can buy and sell shares of the ETF like stocks, and the fund holds gold bars as its underlying assets. Gold CFDs are derivative products that do not require owning physical gold. It is an agreement between investors and brokers to exchange the difference in the price of gold from the time of opening the transaction to deciding to close the position.

Entering the energy commodity market is relatively straightforward. Investors can buy and sell commodities like oil through most brokers. Alternatively, they can invest via energy ETFs, or through energy futures and contracts for differences.

Investing in the S&P 500 index can be achieved through ETFs, index futures, and CFDs. Leverage can be used for short-term investments. However, index futures have a relatively high entry threshold, requiring greater capital from investors.

There are fewer ways to invest in the NASDAQ Composite Index. For example, only one ETF is tracking it: QNEQ. Compared to the NASDAQ index, what people trade more often is the NASDAQ 100 index. The NASDAQ 100 index includes the top 100 non-financial stocks on the NASDAQ exchange, contains more tech stocks, and is also known as the US Tech Stocks 100 index.

For long-term investment in the Dow Jones Industrial Index, one can select ETFs like DIA and DOG. For short-term investment, trading Contracts for Difference (CFDs) can be a preferable option due to its lower investment threshold.

Cryptocurrency trends are closely tied to the US macroeconomic situation, directly impacting US stock indices. Thus, both cryptocurrencies and US stock indices are generally influenced by US macroeconomic policies, such as interest rate cuts and the CPI index. As a safe-haven asset, gold’s value is most affected by supply and demand. During a bear market for cryptocurrencies, investors often increase their investments in safe-haven assets like gold.

Return on Investment and Risk

Bitcoin is the highest market cap cryptocurrency, and its price, to some extent, measures the trend of the cryptocurrency market. In the past, the price trend of Bitcoin has shown considerable returns. According to a report by Messari researcher, over the past 10 years, the annualized return on Bitcoin reached 230%, overwhelming other asset classes by at least 10 times. On the other hand, cryptocurrency has a large volatility, and governments worldwide are still formulating cryptocurrency regulations. Due to the unclear regulatory framework and different practices in different jurisdictions, investors face high risks and uncertainties. In this cycle, the price of BTC dropped from a high of more than 60,000 US dollars to a low of less than 20,000 US dollars. It can be seen that cryptocurrencies, while implying huge profits, also face greater volatility and security risks.

Gold is a special type of asset that can bring long-term positive returns. The global gold market has strong liquidity, and over the past 10 years, it has outperformed most stocks and bonds with a return rate of nearly 10%. Gold has a weak correlation with other assets and has the function of resisting inflation, hedging risks, and asset allocation.

Investing in the three major U.S. stock indices requires investors to understand the overall status and trends of the U.S. economy. Historical performance shows that after the Federal Reserve significantly raises interest rates, the U.S. economy often falls into recession. During a recession, the Nasdaq index often falls more than the S&P 500 index and the Dow Jones Industrial Average. However, the Nasdaq index, benefiting from the AI boom, has a greater chance of experiencing a larger increase. According to a survey, the return on the Nasdaq index over the past 10 years has reached about 20%, ranking first in traditional finance.

Conclusion

In the past decade, cryptocurrency has outperformed other asset classes with its high annualized returns. But with its high volatility, investors face a lot of uncertainty. In contrast, traditional financial investments offer stability, regulatory protection, and lower investment risks. Gold, as a safe-haven asset, has been increasingly recognized by investors in recent years. However, whether it is any type of asset or a diversified investment portfolio that combines multiple asset classes, investors must carefully assess their risk tolerance and investment goals, and always conduct thorough research.