Investing in Crypto vs Stocks
Introduction
- Cryptocurrencies are digital assets that run on cryptographically secured distributed networks. They can be used as a medium of exchange and store of value. Stocks represent fractional ownership of shares in a company. While they are different asset classes, both crypto and stocks are tradeable and can be seen as investment vehicles.
- Crypto is a newer financial instrument that is prone to higher price volatility and risk. Stocks are a long-established asset class that can yield both long and short-term returns. While both instruments attract traders and investors, cryptocurrencies are often seen as an alternative to more traditional assets. There can be profitable strategies in both markets. This article breaks down the key differences between the two assets as well as their pros and cons.
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| Crypto vs Stocks |
- In simple terms, cryptocurrencies are digital currencies powered by blockchain technology. They rely on cryptographic techniques to secure and verify transactions and are typically used as a medium of exchange and a store of value.
- However, its unregulated nature makes cryptocurrency too risky to support a complete financial system, as it lacks government backing and its value is determined by the market.
- Most cryptocurrencies run on decentralized networks of computers spread around the world and can only be accessed through a password of at least 16 characters that only those who acquire them have access, as their security is based on strong cryptography. Their market value is driven by supply and demand.
What is a stock and Stock Market?
- Stocks represent partial ownership of equity in a business, and they reflect the value of a functioning company. Investors benefit when the value of the stock increases, which can be due to the company's performance. The more sales and profits a company makes, the more its shares should rise. Sometimes the owner of a stock is also entitled to a share of the company's profits in the form of a dividend.
- The stock market broadly refers to a number of exchanges and other venues in which shares of publicly held companies are bought and sold. Such financial activities are conducted through institutionalized formal exchanges (physical or electronic) and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.
- While both the terms “stock market” and “stock exchange” are often used interchangeably, the latter term is really a subset of the former. Traders in the stock market buy or sell shares on one or more of the stock exchanges that are part of the overall stock market.
What are the differences between cryptocurrencies and stocks?
- Both cryptocurrencies and stocks can be used by investors to build wealth. Yet, investing in stocks is different from investing in crypto.
- Unlike stocks, investment in crypto doesn’t come with ownership of a share of a company. Crypto investors also don’t receive dividends in the traditional sense. Instead, one can lend or stake their crypto tokens for passive income.
- There are also major differences in how crypto and stocks are traded. You can buy crypto at any digital currency exchange at any time of day and night, while stock exchanges operate with limited opening hours on weekdays.
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| Key Differences |
Cryptocurrency vs. stocks: The core differences
Cryptocurrency and stocks are valid investment choices, but
they serve different purposes in a portfolio. Stark differences exist in how
they’re bought and sold as well as how they serve an investment strategy.
Here’s a look at key characteristics of crypto and stocks:
- Ownership - To buy and keep stock, a buyer usually has to open an account at a broker such as Zerodha, Upstox, Angel One etc. The broker makes trades and holds stock in the buyer’s name. A buyer also has to disclose personal information, such as their PAN, Aadhar number and Address. One of the perceived benefits of crypto is its anonymity. No one needs to know who the crypto buyer is. A crypto owner holds assets in a virtual wallet or on a storage device, such as a USB drive. The downside of anonymity is that responsibility for security falls on the owner, who has to keep track of where the crypto is and remember a password of at least 16 characters. Owners have little recourse if hackers clean out their crypto wallets.
- Exchanges - Stocks are traded on accredited exchanges throughout the world. They offer stock buyers security, stability, and transparency and are built to handle large trading volumes every day. Exchanges are strictly regulated (although specifics vary by country), providing protections to buyers and sellers. Exchanges for buying and selling cryptocurrency are newer. Dozens, if not scores, of crypto exchanges exist. Two of the largest are Binance and Coinbase. Some exchanges work with third parties to smoothly exchange conventional currencies, such as the U.S. dollar, for crypto.
- Volatility - Sudden and rapid changes in stock values are as old as stock exchanges. A piece of good news can launch a stock higher, just as bad news can send it lower. As the terms “Black Friday” and “Black Monday” attest, stock markets can plunge in a day. Usually, there’s an explanation, either economic or technical (such as a program-driven sell-off). Investors might see the value of their portfolios tumble, but total losses are rare. One thing cryptocurrencies have been known for is their volatility. Ethereum, for example, started 2021 at about $730 and rose to $4,080 at the end of May. It dropped to about $1,786 in July, before rising to $4,082 in late October.
- Regulation - The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s primary functions include protecting investor interests, promoting and regulating the Indian securities markets. Companies are required to disclose all information that can have an impact on their stock value. Investors and their financial advisors have a good deal of information on which to base their investment decisions. By contrast, cryptocurrencies remain largely unregulated, which, for some crypto investors, is a mark in crypto’s favor. Crypto markets know no borders and are beholden to no governments. However, it leaves crypto buyers with no protection if something goes wrong with their investment.
- Strategic complements - Cryptocurrency and stocks have some similarities as well as major differences. Investment professionals who recognize the strengths and weaknesses of each can use them in the same portfolio for different reasons. Stocks provide stability. They’ve been the go-to investment to build wealth for individuals and organizations for most of the 20th century and into the 21st century. Cryptocurrency is the riskier investment. It offers the chance for big rewards, but at higher risk. Together, they can help balance reward and risk in an investment portfolio.
Should I invest in cryptocurrency or stocks?
So, is crypto better than stocks? Not necessarily. Depending
on your risk tolerance, you could consider investing in both. Adding crypto to
your stock portfolio can be a great way to add some valuable diversification
and open the door to potentially lucrative returns—without leaving yourself
fully vulnerable to the risks of either investment. Before you invest any
money, consider the following:
- How much can you afford to lose? A well-hedged stock portfolio can sometimes offer a more stable home for your money than crypto investments.
- How much are you hoping to make? Stocks can generally offer more stable returns, but crypto can potentially offer higher gains.
- What’s your timeline? Crypto’s price fluctuations might help you make money much more quickly than the stock market’s longer horizons, but can also lead to significant short-term losses.
Pros and cons of investing in cryptocurrency and Stock Market
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Pros of Investing in
Cryptocurrency |
Cons of
Investing in Cryptocurrency |
|
Accessible: Crypto is borderless, and
anyone with an internet connection can use it. |
Imperfect regulation: Cryptocurrencies are
legal in many countries, but they're not fully and universally regulated.
Investors should be mindful of potential compliance issues and do legal
research according to their location. |
|
Decentralized: Most cryptocurrency systems
don’t rely on a central authority, making crypto resistant to censorship and
centralized control. |
Custody risks: Cryptocurrencies like
Bitcoin require a private key to access the tokens stored in a digital crypto
wallet. Forgetting a seed phrase or losing a physical crypto wallet could
result in losing access to your crypto forever. |
|
Inflation-resistant: Cryptocurrencies
aren’t directly influenced by central banks’ monetary policies, so their
prices are less malleable to inflation. However, cryptocurrencies are not all
the same, so it’s important to consider the issuance rate and supply of each
crypto asset. |
Returns not guaranteed: Like any financial
market, there are no guaranteed returns with crypto. While Bitcoin and other
altcoins performed well in the long term, there is no guarantee that they
will continue going up in the future, and there is always a chance they may
not do well during a shorter investment period. |
|
Flexible: Compared to stocks, there are
more ways for investors to grow their crypto holdings besides trading. Crypto
investors can get profit from yield farming, staking, and providing
liquidity. |
Cybersecurity risks: Despite
cryptocurrency enthusiasts touting the security benefits of digital coins,
there have been notable hacks involving cryptocurrencies. It is often
difficult to recover stolen funds. |
|
Varied: The value of many tokens is not
just monetary. For one, Fan Tokens can provide token holders exclusive
benefits and privileges with their favourite sports teams or brands. Some
cryptocurrencies are governance tokens, which give holders the right to
participate in the development of a respective project or protocol. |
No intrinsic value: Cryptocurrencies have
no intrinsic value, which means they aren’t backed by underlying assets or
earnings the way that stocks are. Stocks have value because of their future
earnings power and what they will return for their owners, while
cryptocurrencies offer nothing of the sort. |
|
Possible hedge against fiat currency: For
some investors, one of the biggest appeals of cryptocurrencies is its
decentralized nature. It’s not controlled by central banks or governments who
like to print money and generate inflation in fiat currencies such as the Indian
Rupees, U.S. dollar or the Euro. Cryptocurrency has been called “digital
gold” by some investors who hold it because they think it will protect them
from inflation. |
|
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Pros of Investing in Stock Market |
Cons of Investing in Stock Market |
|
Increasingly
accessible: It is becoming easier to invest in stocks, with many online
platforms and mobile apps emerging in the market. Many such offerings have
intuitive interfaces and are integrated with other financial services. |
Volatility:
The stock market, too, isn't immune to sudden changes in prices in the short
term. If a company is doing well, its stock prices will likely go up.
Similarly, if a company reports losses or receives bad press, the stock value
will likely go down. |
|
Regulated:
Many governments heavily regulate the stock market. For example, in the India,
publicly traded companies must disclose information that can impact their
stock value to Securities and Exchange Board of India (SEBI) a government
oversight agency in charge of investor protection. |
Higher fees:
In most cases, the fees associated with stock exchange transactions are
relatively high, and there are more of them compared to cryptocurrency
trading. On top of brokerage fees and commissions, there are also other
charges when you purchase or sell your stocks. |
|
Variety:
There is a wide selection of stocks across different industries and sectors
that are available to retail investors. Traders can choose equity based on a
large number of criteria, from the company’s business model and location to
whether or not they pay dividends. |
Returns not
guaranteed: Like any financial market, there are no guaranteed returns with
stocks. While there are stocks that often outperform alternative investments
in the long term, there is a chance that they may not do well during a
shorter investment period. |
|
Long history
of returns: Stocks have a long track record of producing solid investment
returns, with the NIFTY 50 and BSE SENSEX returning about 12 percent over the
long-term. Though stocks can be volatile in the short term, they have
generally been safe to hold over long periods of time. |
Lower
potential for extreme gains: Broad stock indexes like the NIFTY 50 and BSE
SENSEX likely have less potential for the extreme gains that can sometimes be
found among cryptocurrencies. Stocks have returned about 12 percent over the
long term, whereas it’s common for cryptocurrencies to move 12 percent in a
single day. |
|
Have
intrinsic value: A stock represents an ownership interest in a company and
its value over time depends on the success of the underlying company.
Companies own assets that produce earnings and cash flow for investors,
creating what’s known as intrinsic value. |
|
Portfolio management
As you’re thinking about constructing your portfolio, you
don’t have to make an either-or choice between cryptocurrency and stocks — or
other kinds of asset such as bonds or funds, either. It’s all about weighting
your portfolio in a way that fits your risk and time horizon.
- Cryptocurrency - Given its inherent risks, cryptocurrency works better with a small allocation in your overall portfolio. Think 5 percent or less. Even a small allocation could do wonders for your portfolio if cryptocurrency really takes off. Also, limiting to a small allocation protects you against a complete loss if crypto goes nowhere. If crypto grows to be a significant portion of your portfolio, you can re-allocate more of your money to stocks to lower your portfolio’s overall risk.
- Stocks - Given stocks’ strong long-term record, a diversified collection of stocks should make up the majority of your portfolio, especially if you have decades until you need to tap it. If you’re investing in individual stocks, you’ll need to research your stocks carefully to achieve good returns. If you’re investing in funds, you can buy a broadly diversified fund such as an S&P 500 index fund without significant research and enjoy the potential for high returns.
Closing thoughts
Some cryptocurrencies have soared in price since being
introduced over the past few years, but investors need to understand what
they’re investing in, instead of just rushing in because other traders are. If
you decide to take a stake in crypto, consider how it fits with your own risk
tolerance and financial needs. Investors can earn good returns without
investing in cryptocurrency, and some investors, including legends such as
Warren Buffett, won’t touch cryptocurrency.
Thanks for reading the Article
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