In Today's Market, Should You Invest in Cryptocurrency or Stocks?

There are two kinds of investors asking the same question from opposite sides. Stock-heavy investors want a slice of crypto's supposedly explosive upside. Meanwhile, crypto natives want steadier equity exposure during a period when stocks seem to keep trending up and up.

Both are hunting for the same thing, which is long-run compounding without sleepless nights. So which should you be investing in?

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What these asset classes bring to a long-term portfolio

The fact of the matter is that nearly all investors should own some kind of vehicle that gives them diversified exposure to the stock market.

For instance, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is an exchange-traded fund (ETF) that tracks the S&P 500 (SNPINDEX: ^GSPC), and it owns large caps across all 11 economic sectors with a 0.09% expense ratio, giving investors instant breadth at a low cost. The S&P's long-term nominal return has hovered near 10% annually, with real returns closer to 6% to 7% after inflation, which is the compounding expectation most investors should anchor around. Buying the market is thus one of the best ways to anchor your portfolio.

Layering in specific stocks to get more upside is also a smart move. One example might be buying Nvidia (NASDAQ: NVDA), which has become the capital-spending heartbeat of artificial intelligence (AI), with revenue of $46.7 billion in the latest quarter, up 56% year over year. Owning a portion of that company's very real growth means taking on a lot more risk than buying the market, but the cash generation tied to AI capital investment is hard to ignore.

But what about crypto? Bitcoin (CRYPTO: BTC) is a scarce digital asset with a fixed 21 million cap on its supply and a growing base of institutional holders. Its price has trended upward consistently, indicating persistent demand. But rather than revenue growth, buying Bitcoin means buying the investment thesis that it's digital gold, which is to say that its scarcity means its purchasing power as denominated in fiat currency will be preserved over time.

For growth stemming from crypto, there's Ethereum, (CRYPTO: ETH), which is the leading programmable chain for smart contracts, used for everything from managing stablecoins to tokenized real-world assets (RWAs). Because it needs to attract users and capital to its ecosystem, it doesn't have the same store of value theme that Bitcoin does, and instead it has risks stemming from the nature of its product-market fit. Therefore, it might grow more, but its volatility and downside risks are also far higher.

Diversify and keep risks controlled

So where does all of that leave investors?

It's a good idea to own both crypto and stocks. The main question is how much to allocate to each segment within each of those categories.

One decent plan for investors is to let stocks and market-tracking ETFs carry the majority of their portfolio's load, and use crypto in a smaller allocation to get some exposure to market-beating upside, as well as value preservation. The point of doing this is to take on enough risk to ensure that your wealth grows over time, but not so much that you can't sleep at night.

For most investors, that means keeping about 90% of their portfolio in stocks, and 10% in crypto. In my view, at least half of your allocation to crypto should be going to Bitcoin because it's the safest and least volatile option.

Why not push further out the risk curve by buying altcoins or riskier growth stocks? In short, because small companies and crypto with dream-story vibes often don't compensate you for the blow-up risk.

In practice, the crypto majors already deliver enough volatility and potential upside. It is likely that disciplined rebalancing once or twice a year will harvest crypto's swings while keeping your equity exposure dominant. Assuming crypto's long-term thesis holds, that approach tilts the odds toward better compound growth without betting the house. You can always tweak your exact allocations based on your risk tolerance and performance after a year or so.

In closing, own high-quality stocks, own a stock index, and devote a modest allocation to the top crypto assets, led by Bitcoin and Ethereum, and perhaps others if you can stomach the volatility and want the chance of getting more upside. Build a portfolio that compounds in value over time from multiple sources, rather than betting that one narrative wins them all.

Alex Carchidi has positions in Bitcoin, Ethereum, Nvidia, and SPDR S&P 500 ETF Trust. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Nvidia. The Motley Fool has a disclosure policy.