Bonds have been a very stable investment vehicle, in use by small and large investors worldwide. However, recent explosions in crypto prices and valuations have got many investors thinking.
Crypto assets may be way more volatile than bonds. But on the positive side, they offer potentially higher returns on the investment. And this makes them very attractive in their way.
If you are caught between these two markets and wondering how to tackle the issue, then this article is for you. It looks at all the major features of both methods to help you decide on which is a better investment.
What Exactly is A Bond?
In the investment world, a bond is a fixed-income investment that is appreciated for its simplicity. It is a debt owed by the bond issuer, which promises to pay the lender back with an interest.
Bonds can be issued by local and federal governments or corporations for specific projects. Each bond is a unique instrument with unique details though – with the coupon rates and maturity dates varying.
Following are some of the major characteristics you will find on a bond:
- Maturity Date – This is the date that the bond issuer will pay the bondholder or investor the full face value of the bond. It can range from 3 months to 20 or more years.
- Face Value – This is the full amount that the bond is worth. It is the total amount the issuer pays back by the maturity date. (Assuming he does not default)
- Issue Price – An issue price is an upfront cost of owning a bond instrument. It is mathematically the face value minus the coupon rate’s value. So, you can buy a $1,000 bond with a 10% coupon rate for $900 upfront.
- Coupon Rate – The bond’s coupon rate is the percentage earned by the investor. You buy a bond at a discounted rate and the issuer must pay you the entire face value by maturity. Some will pay the coupon rate by installment, such as bi-annually.
- Coupon Date – A bond’s coupon date is the date the issuer pays the investor the yield from the coupon rate. This date can vary from issuer to issuer.
Investing in bonds is a nice way to hedge against inflation while retaining quick access to your capital once the bond matures.
Some bonds can also be traded on the secondary markets after the issue. This secondary market caters to investors who may wish to liquidate their bonds before maturity and on the other side, investors looking for bonds at discounted prices.
Following are the most common types of bonds you can encounter out there:
- Government Bonds – These include bonds issued by both federal and state governments. Their maturities can range from 3 to 12 months for Treasury bills, and up to 20+ years for standard bonds.
- Municipality Bonds – These types of bonds are similar to government bonds, except that they are issued on a much smaller scale by municipalities to finance one project or the other.
- Company Bonds – Established corporations with proven track records of steady earnings can raise debt to finance a new product or growth campaign through bonds.
What are Crypto Investments?
Crypto investment is any financial strategy involving crypto instruments that aim to grow your assets in the long term. And because there are over 1,000 crypto products out there, there is no single crypto investment strategy.
Here is a quick overview of the types of crypto terms and investment types that you may come across anytime:
- Crypto Coins – This term refers to practically any cryptocurrency. It could mean Bitcoin or any of the other 1,000+ competitors.
- Altcoins – This simply means any digital cryptocurrency alternative to Bitcoin. So, any crypto coin that is not Bitcoin.
- Stablecoins – These are designed as less volatile alternatives to standard cryptocurrencies. They are pegged to either other cryptocurrencies, fiat currencies, or exchange-traded commodities. The most popular include Tether (USDT), DAI, Binance USD (BUSD), USD Coin (USDC), and so on.
- NFT – Stands for Non-Fungible Tokens and is also a crypto token like cryptocurrencies. But unlike currencies that can be exchanged for each other (fungible), NFTs are non-fungible, and so make great collectibles. Some NFT artworks have sold for millions.
- Utility Token – Some crypto coins like XRP and ETH are used as payment for work on the Blockchain that they live on. And therefore, they are fittingly called utility tokens.
- Digital Gold – This is any crypto asset that is developed to retain as much of its value as possible and just like gold. A perfect example is Bitcoin.
You should note that, unlike bonds that come with a fixed yield, which is expressed as a percentage of the instrument’s face value, crypto assets are not such traditional investment vehicles.
This fact means that crypto coins are used as an investment vehicle solely for their value as collectibles. In simple terms – you buy the instrument and hope for its price to rise over time.
Crypto investment yields can range from negative ROI (Return On Investment), which means losing money, to over 100% ROI or more per year.
A Quick Side By Side Comparison
To better understand the difference between crypto investments and bonds, here is a side-by-side comparison of both investment instruments.
|Yields||Negative to 100%+||0%-10% p.a average|
|Asset Growth Rate||Can be High||Low|
|Security Risk||Medium to High||Low|
|Market Size||~$2 Trillion||~$100 Trillion|
Pros & Cons of Bond Investments
Bonds are traditional investment instruments that come with many advantages and safeguards to make them attractive. And as a result, most professional investors allocate a percentage of their funds to bonds.
However, they also have some cons that make them less attractive than cryptos. So, it is left for you to weigh both pros and cons to reach a decision. Here is a look at both:
The Pros of Bonds
- Fixed Yield – This is one good thing with bonds. You know exactly how much you are making from your capital and when to expect it.
- Guaranteed Capital – Although bonds come with risks of default, yet, you have better guarantees of getting your capital back than when you invest in cryptos.
- Better Regulation – Bonds are a tried and tested investment vehicle. The bond market is mature with all the regulations and safeguards you can expect.
- Low Risk – Bonds are way less risky than cryptos. So, those looking for low-risk investments to maintain their wealth over time may find bonds appropriate.
The Cons of Bonds
- Inflation – Most economies suffer from inflation. So, you will always have to subtract the inflation rate from the yield to get your true profit. Bonds serve to mitigate the negative effect of inflation.
- Low Reward – Most good bonds offer low yields of a few percentages. Of course, you will find high-yield bonds, but these often come from issuers with a bad history of shaky finances. In other words, the higher the yield, the higher the risk of the issuer’s default.
Pros & Cons of Crypto Investments
Crypto investments also have their pros and cons that make them either more or less attractive than bonds. So, the following is a closer look to help you reach an informed decision.
The Pros of Cryptos
- Huge Reward Potential – Many cryptocurrencies and tokens have been known to deliver high rewards for their holders, so there are no surprises here. The only problem is the ability to discover promising cryptos.
- Hedge Against Inflation – This is another big plus for cryptocurrencies. Assuming crypto rates were steady, then by simply buying a coin, one would be escaping the inevitable devaluation of assets caused by inflation of fiat economies.
- Flexibility – You can start as small or as big as you like with crypto investments. This contrasts sharply with bonds that usually require a large amount of capital.
- Easy Liquidation – Turning your crypto assets into cash is much easier than with bonds. While no one prays for it, this possibility can be a lifesaver in times of emergency, when you might need to cash some investments.
The Cons of Cryptos
- High Risk – Cryptocurrencies are very volatile – at least for now. And this issue makes crypto investments riskier than otherwise. Still, there are ways to tackle the problem. Such as by waiting for prices to hit a support line before buying.
- Scams & Cyber Threats – The Internet is a wild place and this fact is especially true when it comes to crypto assets. As the hacks and scams seem to grow each year. You can avoid most of the scams though, by doing your homework before each investment. And most of the security threats by sticking to cold wallets.
- Government Clampdowns – Although Bitcoin is now legal tender in countries like El Salvador and the Central African Republic, most other countries loathe the effects of cryptosystems on their fiat economies. Many countries are trying to regulate cryptos, while others severely limit its use, and a few simply ban it outright.
Some Crypto Investing Tips
Investing in bonds is straightforward – unless you decide to get greedy. With cryptos is a different story though. So, if you are considering crypto investments, then here are some tips to help you along the way.
Tip 1. Know What you are Dealing With
Education is your best bet here. You will be better off if you understand crypto technologies, terms, and philosophies. Remember that investing through guesswork is simply gambling.
Tip 2. Focus on The Long Term
Investments are for the long-term. You need to part with funds that you will not be needing for the next couple of years. Then watch them grow – hopefully.
Tip 3. Do your Homework
Research the market and understand what each instrument stands for and how it works. Also, read the descriptions and take your time to avoid surprises. Remember that there are no regulators.
Tip 4. Wait for the Bounce
If you are buying a currency for the long-term, then it’s best to wait for it to bounce off of a support line. Never buy around resistance lines.
Fig. 1 Support & Resistance
Tip 5. Stick to Cold Wallets
The best way of storing your crypto assets is with a cold wallet. That is a storage mechanism that is not connected to the Internet. Solutions like Ledger or Trezor are the most popular.
Alternative Investment Methods
The soul of a solid investment strategy is to diversify your efforts and capital allocation. So, while you focus on bonds and crypto investments, here are the other top methods of wealth preservation and growth:
- Gold – The oldest and most trusted method of value storage and inflation hedge. The downside is that you will have to physically secure the stockpile.
- Silver & Other Precious Materials – You can also use silver and other precious materials asides from gold. So long as they are precious and relatively rare. These include Palladium, Platinum, diamonds and other gemstones, etc.
- Commodities – Buying up and storing commodities is another less popular method of wealth preservation and growth. But here, you need to know what sells or not. Plus, you’ll have to provide adequate storage space.
- Collectibles – These can range from jewelry to artworks, limited edition items like watches and cars, etc.
- Stocks – If you have an eye for picking winners, then few endeavors can be as rewarding as picking stocks.
- Inflation-Linked Bonds – The goal here is to maintain the true value of your bond’s yield by adjusting the payments over time to reflect changing inflation rates.
- Smart Bonds – Many organizations are choosing Blockchain solutions to issue and manage their bonds automatically. These new types are known as smart bonds.
We have reached the end of this comparison of cryptos vs bonds. And you have seen the pros and cons of each asset class, as well as the risks and potential profit levels.
The final decision, however, will depend on you. Take your time and think things over before acting.