Why it’s Worth Investing in
Quality Equity Over Cryptocurrencies
Although cryptocurrencies have caught the world’s attention, they are hardly a substitute for stocks trading on exchanges that have been around for over 200 years
Vihaan, an apparel store owner from Hubballi, wanted to buy a luxurious bungalow. However, he was short of funds to make his dream come true.
Impressed by the mad gains his friends were making from cryptocurrencies, he too decided to invest in this new digital asset in a bid to reach his goal faster. However, he woke up one morning to realise he had lost Rs 10 lakh in the crypto market.
Vihaan tried to mitigate his losses by investing in other cryptocurrencies but his losses only widened further. The crypto fever that had gripped him faded away.
Vihaan is not alone. Many people like him look forward to making money from crypto investments.
Thanks to the newness of the concept, it has been able to draw everyone’s attention quite quickly. There is so much buzz about the concept that one of the most searched questions on Google in the finance sector is whether to invest in cryptocurrencies over equity.
Let’s start with the question: What is cryptocurrency?
According to Forbes, “Cryptocurrency is decentralised digital money that’s based on blockchain technology and secured by cryptography.”
Blockchain, a digital ledger, records transactions related to assets.
Access is shared between its users and the information in it is transparent, immediate and immutable to the extent that even an administrator cannot modify it.
Now that you know what cryptocurrencies are, it’s time to learn about the negative dimensions.
Crypto scams
The wave of cryptocurrencies has taken the world by storm, dragging investors of both the institutional and retail variety. But with increased interest from those who will pump money into the industry comes interest from hackers, scammers and other kinds of cybercriminals.
The list of such scams is long and never-ending. Illicit wallets recorded funds worth $14 billion in 2021 alone. Crypto scams can be as simple as phishing and fake websites, or more complex like NFT (non-fungible token) rug pulls. They are particularly difficult to spot and the stolen funds are almost impossible to track at times.
Crypto volatility
What is at ₹10 today can go to ₹100 tomorrow and exactly a day later can go all the way down to ₹ 0. It’s a mirage, not real money. The crypto market hit multiple all-time highs and lows throughout the year, leading to large gains and losses for many investors.
No doubt, the crypto market is highly volatile.
As stated on CNBC in February 2020, cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a cheque, they can’t do anything. What you hope is that someone comes along and pays you more money for them later but then, the problem only shifts to that person.
In terms of value: zero. Caution! Red alert, you investor.
Crypto taxes
Income from the transfer of any virtual digital asset will be taxed in India at 30 percent — that’s high, right? Higher and riskier than other available investment options. Still, while a heavy tax doesn’t make crypto legal, there have been many unconfirmed reports of a ban on private cryptocurrencies in India. In fact just yesterday, the government clarified in the parliament that losses arising from trading in one virtual digital asset (VDA) will not be allowed to be set off against gains made in another VDA. In addition to the high tax rate, this clarification is a further attempt to discourage people in trading in cryptocurrencies.
Savvy investors must know exactly what they are investing in. It is crucial to weigh the risks and rewards of investing and what will drive the success of the investments. If investors like Vihaan don’t have this kind of information, they can’t make the calculations. In this case, it’s not an investment, but a gamble.
Equities or cryptocurrencies: which is the better investment?
Investing in cryptocurrency isn’t exactly bad. But looking at its various dimensions, cryptocurrency can be a risky investment and one should only consider investing if financially equipped or willing to lose money, considering the volatility. There must be some reason successful investors like Warren Buffet do not favor crypto.
If cryptocurrency is not an option, then how should somebody like Vihaan who has a reasonable risk appetite, no-so-high disposable income, and a high standard of living plan to make money from investing?
Well, as per a popular school of thought, investments assure you positive returns on the basis of the time period of their existence. For example, the London Stock Exchange was established in the year 1801 and the Indian Stock Exchange was established in 1875. The crypto market started only in 2009.
The stock market has been around for over 200 years, while cryptocurrencies are just about 12 years old. Experts are still unsure of where this new mode of investing will end up. Quality businesses generating great returns in India have an average existence of 50 years.
If history is any proof, then investing in such quality stocks doubles your investment principal in just 3 years. Aptly suitable for somebody like Vihaan.
Have a detailed look at the returns generated by quality portfolios over the years since 2009.
Of all the differences between stocks and cryptocurrency, the most important is that a stock is an ownership interest in a business and it is backed by the company’s assets and cashflows. A cryptocurrency, in most cases, is not backed by anything at all.
In simple words, quality investing is nothing but investing in stocks of companies that are fundamentally very strong. They are big franchises with sustainable long-term business models. They display a credible and long track record of profitability with robust, predictable cash flows and justifiable high return on capital. Their growth potential and economic moat are powerful. With honest and capable management, they focus on healthy profit margins and solid balance sheets.
With these qualitative parameters, the following quantitative parameters are used to build a quality portfolio of 14 businesses (Stocks), infamous for their great returns in the long run:
The market capitalization of over ₹ 1,000 crores (Market capitalization = number of shares outstanding multiplied by the market price per share).
The company should have been around for at least 10 years.
Over the last ten years, the company should have consistently delivered a profit margin of at least 10 percent and a Return on Capital Employed (ROCE) of at least 14 percent.
Conclusion
Though crypto is slowly becoming one of the most accepted digital currencies in the world, we cannot say what its future looks like. You cannot be looking at it all day and expect something out of it — that’s delusion and speculation. Of course, it has its share of efficiency and transparency, but it comes with a lot of risk and volatility, too.
‘Quality’ never goes out of style. It’s always in fashion — like it’s been over the past 200 years or will be 20 years from now. It’s best for investors like Vihaan to consider quality portfolios instead of the mirage-like crypto market.
This news article was originally published on moneycontrol.com by Author Vinayak Savanur.
