🦉 Stocks Vs Crypto

Many young investors are focusing less on stocks and bonds these days and are more interested in buying crypto and alternative assets.

Lets dive into some data and see what’s happening between the traditional finance (“TradFi”) and decentralized finance (“DeFi”) worlds and what it means for wealth building in the years ahead.

Stocks vs Crypto: The Great Generational Divide

TradFi has begun quantifying young investor’s investment preferences. And no surprise It’s very different from older folks.

Looking at the graph, I am a bit surprised that crypto’s allocation is ONLY 14% for younger people.

I think one reason this average may be low, is because of a further differentiation of between millennials and Gen-Z.

Looking at social media I can see that Millennials, like myself, tend to view crypto and other alts as risky side bets to a traditional portfolio. Whereas for many Gen-Z investors, crypto and alts are THE PORTFOLIO.

A lot of attention goes into generational, ideological, and technological reasons for the boom in crypto.

But I think the numbers tell most of the story. Look at this great chart:

Bitcoin (as a proxy for all crypto) has outperformed every other asset class over the last 13 years. With a monster 150% annualized return. It has outperformed everything in 10 of the last 13 years.

If the game of investing is to get the highest returns, and well go back to this assumption, then crypto is the undisputed winner. Case closed.

For anybody aged 21 to 43, witnessing this wealth creation while growing up, going all-in this thing is the logical thing to do.

The trillion-dollar question is what returns will crypto have going forward.

I wish I knew.

So much wealth has been created in crypto that a lot of that money is never coming back to TradFi. Critical mass has been achieved, and there are a million offshoots occurring within DeFi.

VC money is all over it. And major financial institutions are building on-ramps for mainstream investors - like ETFs.

Based on that we should all be confident that crypto is here to stay. And with it, the alt-coin, meme-coin, shit-coin, NFT… ‘degen economy’.

On the other hand, is BTC going to 1000x again?

I continue to search for the mental frameworks to answer this question. And look out for what the visionaries are saying:

An interesting approach is using the S curve of other technological developments. As explained by Jurrien Timmer, Dir. of Global Macro at Fidelity:

So maybe still plenty of room run, but not a repeat of the last decade?

What's going on in crypto markets right now?

The key thing to understand is that crypto markets move in repeating cycles, marked by distinct phases. Accumulation and distribution are the two periods that smart investors try to spot.

The accumulation phase usually happens after a market downturn, when weak investors have been shaken out - think 2022-2023. Prices have hit bottom and are moving sideways, and sentiment is shit.

This phase sucks and can last a long time, but it's the best opportunity to "accumulate" a position.

Historically, the accumulation phase (yellow area in the chart below) ends with the halving (blue vertical lines with dates at the bottom). The last halving event was in April 2024.

And working pretty much on schedule, after the halving and some chop, we've just entered the most exciting part of the cycle for those who managed to build their positions (green area on the chart).

As Bitcoin hits new all-time highs, it will pull the entire alt-coin ecosystem up with it, leading to explosive growth.

And FOMO, lots and lots of FOMO.

How high will BTC go? $100k? $250k?

Who knows.

But don’t forget that at the other side of the parabolic phase is the distribution phase—when the market peaks. Early investors start selling to take profits while new investors pile in due to FOMO.

And this is what you want to avoid doing my friends - being bag holders.

What is so unique about crypto, as a financial asset, is it’s perfect suitability for speculation.

In the dotcom era, companies like pets.com eventually faced reality when sales declined, results didn’t meet expectations, and cash ran out.

Very little of this applies to crypto.

Many critics point to this lack of fundamentals as proof that it’s all BS. But they fail to see the reverse of this argument.

If we look at the extreme end of the crypto world:

Doge, Shiba inu, Moon, Dogelon mars, CumRocket… 🤣 

Very few of the promoters or holders think there is something serious behind them. And they don’t care.

It’s pure human emotion and speculation!

And although treacherous, that is a fuel of endless supply.

Now, what does this all mean for the traditional stock and bond portfolio?

Right now, crypto’s entire market cap is around $3 trillion. Which is big!

But compared to global equities? Still tiny.

If younger generations maintain large allocations to crypto, could this eventually impact stock valuations?

Maybe.

I sign up to the Buffett school of thought, where equities are part ownership in a business. Businesses that generate earnings and cash flow for shareholders—something hard and tangible.

However.

The multiple attached to that share, earnings, or cash flow is partly driven by supply and demand, which goes back to human emotion.

Over the next two decades many say boomers will be cashing out of their stock and bond portfolios to fund their retirement.

Potentially presenting a headwind for the classic 60/40 portfolio?

I don’t think so.

The same was said about boomers and the residential real estate market. Assuming they would downsizes their homes. Yet Boomers are not moving out. They sure as hell don’t wanna go to retirement homes, and I don’t blame them.

@agstaton15

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Similarly, they are holding on to their stocks. In part because they are living longer. And they don’t want to sell their winners and on top trigger a big tax bill.

Of course this applies to the wealthy, who can afford not to sell.

But that’s just the thing. That’s who owns the stock market!

Most of this wealth will be passed on to young investors, bringing us back to the question:

What are young investors going to do with it? You tell me.

Young Investor Takeaways

What you don’t have and don’t need

For those that got in real early to crypto, respect. I wish I had. The crypto phenomenon is fascinating, and a perfect reminder how much I don’t know.

I have a small allocation to the largest coins since a couple of years ago. Why? Regret minimization. I didn’t wanna miss the next up cycle when everything goes 10x again.

On the other hand I am not gonna go all-in.

Managing my family’s long-term money, that is a level of risk I don’t want and don’t need to take. I would much rather miss out on bigger gains than be wrong if all the crypto cycle stuff ends up being wrong.

These situations remind me of Warren Buffett’s advice following the spectacular blow-up of Long Term Capital Management in the late '90s. Which was run by some of Wall Street's most educated, wealthy, and respected people:

Take risks, yes. But don’t go crazy all-in. That’s my advice.

Making money and keeping money are two different things!

Old pilots and bold pilots

A huge lesson I have learned over the years is that investing isn’t about hitting a home run every time. It's not about maximizing returns at every opportunity.

As the old saying goes “There are old pilots and bold pilots, but no old, bold pilots.”

An ingredient in winning over the long term is letting compounding do its work—making steady, incremental gains rather than chasing every big win.

This approach may seem less exciting, but it’s a proven strategy for preserving and building wealth.

I know it sounds boring. Esoecially when sometimes it feels like the world is changing before our eyes. Rockets, AI, crypto…. And it feels like people are making millions left and right.

However not everything is changing or will change.

Nassim Taleb’s Lindy Effect reminds us that the longer something has been around, is also a sign of how likely it is to endure into the future.

Which means a lot of cutting edge developments occurring now will fizzle away into nothing.

A recent example is the performance of the ARK Innovation ETF, which promises to invest in the hottest technological trends today, compared to Warren Buffet’s Berkshire Hathaway - proving again how the Tortoise can beat the Hare in the end.

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