What to Invest In: Cryptocurrency vs Stocks?
In the last decade, cryptocurrencies have slowly crept into mainstream investors’ portfolios.
Bitcoin has established itself as a solid store-of-value asset allowing retail and institutional investors to shield their capital from the increasing inflation caused by the Covid-19 crisis.
Now cryptocurrencies are even starting to rival stocks as they bring new opportunities. They are becoming a solid option for diversifying portfolios as high-risk, high-reward assets and even provide passive income for the most daring of investors.
In this article, we will compare stocks to cryptos like Bitcoin and lay down their similarities and differences. This should give you a good idea of which asset might be the better choice for your portfolio, considering your risk profile and profit appetite.
What to Know About Stocks and Cryptocurrency?
Stocks are regulated investment assets that represent the equity of a company. This means that when investing in stocks, you own a part of the company itself, which is why stock owners are referred to as shareholders.
While individuals can buy and sell stocks for profit, these assets bring other advantages as well. For example, when a company makes profits during a fiscal year, it pays out dividends to the shareholders. This allows stock owners to access a regular stream of income if they choose the right stock.
It’s important to note that stock issuance is regulated by the government. For a company to go public and offer its stock on the markets, it needs to go under close scrutiny from regulatory bodies.
Cryptocurrencies, on the other hand, are digital assets that do not represent equity in a company. Consequently, when buying ether or Bitcoin, you are not buying a share of a company, but instead a speculative asset that can be used as a currency.
The issuance of cryptocurrencies is not regulated by a central governing body. Instead, cryptocurrencies are issued following a decentralized and transparent consensus algorithm. As such, anyone can create their own cryptocurrency without having to go through regulations. Consequently, the value of cryptocurrencies is not backed by capital but is formed purely on the speculation of market value.
What Are the Similarities Between Stocks and Cryptocurrency?
To the untrained eye, stocks and cryptocurrencies might seem quite similar. They are both volatile assets and can be used for making profits by speculating on their price.
Stocks have always been considered volatile assets, much more so than government bonds or currencies. However, this volatility is dwarfed when compared to cryptocurrencies. While both assets can widely fluctuate in price following market news, cryptocurrencies have much more drastic price spikes and crashes.
Crypto Trading vs. Stock Trading: Key Differences
While stocks and cryptocurrencies are similar in some of the aforementioned aspects, it’s their differences that stand out the most.
1. Government Regulation
As we mentioned earlier, stocks are entirely regulated assets. Companies need to go through an intricate process before they can list their shares on the market. This involves an evaluation of their capital, real estate, cash flow, etc. Moreover, trading is closely watched by government agencies to prevent fraud such as wash trading and insider trading.
Conversely, the main appeal of cryptocurrencies is that they aren’t controlled by anyone. Anyone can create a cryptocurrency and release it into the market. While this is a great way to get funding for start-ups, it can also be easily abused. Without regulation, the price can be manipulated and quickly rise and fall, leaving investors holding worthless coins. As a result, this makes stocks much safer than cryptocurrencies.
2. Working Hours
Another huge difference is that the stock market works business hours (9 to 5, weekends off), while the cryptocurrency market is open 24/7. This can be a simultaneous benefit and a drawback for cryptocurrency traders.
It allows crypto traders to maximize profits and avoid high volatility periods of the market opening or closing. However, this day-and-night trading can take a toll on traders. Crypto trading is stressful, and many can register severe losses overnight when they are not paying attention to the market.
3. Third-Party Involvement
In this regard, stocks and cryptocurrencies are quite similar. Users need to connect with a stockbroker or a cryptocurrency exchange to start trading with either asset. This usually involves an identification procedure that is compliant with regulating bodies.
However, cryptocurrencies also provide decentralized solutions without any third-party involvement to purchase and trade assets. Decentralized exchanges use smart contracts and allow crypto markets solely through automated protocols, without the need of an intermediary.
4. Source of Profit
While both assets can be used for speculation and making profits from the price fluctuation, they provide different ways to make passive income. Stocks pay out dividends to shareholders whenever the company makes profits during that fiscal year. While this can be a lucrative venture, it entirely depends on the performance of the business.
It’s worth noting that not all cryptocurrencies provide earning opportunities. However, crypto investors can use staking mechanisms of proof-of-stake coins. They can lock up their holdings on the blockchain to secure the network and receive steady earnings for their service. Moreover, cryptocurrencies can be used to provide liquidity to decentralized exchanges and receive a portion of the trading fees.
Cryptocurrencies get their value from their speculative nature. They have no intrinsic worth, nor are they backed by real-world assets. Their value can go to zero if interest from investors disappears. Stocks, on the other hand, represent the value of an underlying company. Their value can’t really go to zero unless the company goes completely bankrupt.
That said, cryptocurrencies can be used as a peer-to-peer means of exchange, while stocks cannot.
How to Make the Right Investment Choice?
Choosing the right stock is a matter of personal choice. Cryptocurrencies have bigger profit potential but also come with higher risks. Stocks, on the other hand, can be volatile, but are regulated and less susceptible to fraud or scams.
In any case, they present a different type of investment opportunity. As a well-informed investor, you might want to consider owning both types of assets. This will allow you to diversify your portfolio and reduce your dependence on a single asset class.