TL;DR
Cryptocurrencies are digital assets that run on cryptographically secured distributed networks. The secured cryptographic network makes it impossible to counterfeit or double-spend. Many cryptocurrencies run on a decentralized distributed ledger, also known as a blockchain. One defining feature is that they are not issued by any central authority rendering them immune to government interference. Another feature is that they can be used as a medium of exchange and store of value.
Stocks represent fractional ownership of shares in a company. This ownership entitles the stock owner to a portion of a firm's assets and profits. Stock is generally sold and traded on stock exchanges and is a popular part of many individual portfolios. These sorts of transactions generally need to conform to regulations set out by the government.
While they are different asset classes, both crypto and stocks are tradeable and can be seen as investment vehicles.
Introduction
Stocks are a long-established asset class that can yield both long and short-term returns.
Corporations issue(sell) stock in order to fund and operate their businesses. Holders of this stock (aka a shareholder) buy a piece of the corporation. Depending on the type of shares they hold, they may have a claim over a company's assets and earnings.
On the other hand, crypto is a newer financial instrument that is prone to higher price volatility and risk. As with many newer financial instruments, they tend to be more volatile. Cryptocurrencies are simply digital assets that are secured by a cryptographic system. They exist over a blockchain. They enable cryptocurrencies to be traded and used as payment without a central authority.
While both instruments attract traders and investors, cryptocurrencies are often seen as an alternative to more traditional assets. That said, there can be profitable strategies in both markets. This post breaks down the key differences between the two assets as well as their pros and cons.
What is cryptocurrency?
In simple terms, cryptocurrencies are digital currencies powered by blockchain technology. The word "Crypto" refers to various encryption algorithms that safeguard the ledger. There are many techniques that aid in this such as public-private key pairs, and hashing functions, among other things. The cryptographic techniques secure and verify transactions and are typically used as a medium of exchange and a store of value. One thing to note is that to a limited extent most cryptocurrencies are used for cross-border transfers.
Most cryptocurrencies run on decentralized networks, and their market value is driven by supply and demand. The supply and demand are based on many factors including how much a cryptocurrency is traded for or sold. There are many different ways to obtain cryptocurrencies. Some of the more common ways are through mining or purchasing them from cryptocurrency exchanges.
One last thing to note is that although cryptocurrencies could typically be used as a medium of exchange, not all e-commerce sites allow purchases using cryptocurrencies. In fact, popular cryptocurrencies like Bitcoin, are hardly used for retail transactions. Nevertheless, due to its meteoric rise in value, it has become a popular trading instrument for many investors.
What is a stock?
Stocks are issued by a corporation in order to raise money and fund operating expenses.
They reflect the value of a functioning company and are an expression of partial ownership of equity. In some cases, stockholders may also be entitled to a portion of the company's profits in the form of dividends. Stock values can change based on a number of factors, including the performance of the company and any relevant news or announcements.
One important thing to note is that stockholders do not own corporations; instead, they own shares issued by a corporation. Further, stocks could be bought or sold usually on exchanges however there are times when they could be private sales, and this is usually before a company has an IPO.
Stocks are usually not used as a medium of exchange meaning you can't use them for daily economic activities. They are not supported as a form of payment in e-commerce sites or stores. Nevertheless, due to their nature and longstanding status as a traditional financial asset, they remain a popular option for many portfolios.
What are the main differences between cryptocurrencies and stocks?
Cryptocurrencies and stocks are investment assets that investors can use to build wealth. Cryptocurrency investing, however, differs from stock investing in a number of ways.
With crypto, an investor does not own a company's stock. Also, crypto investors do not receive dividends in the traditional sense. Instead, crypto tokens can be lent or staked for passive income. Stocks, on the other hand, can generate cash flows in the form of dividends.
In addition, crypto trading differs significantly from stock trading as well. Unlike stock exchanges, crypto exchanges allow you to buy crypto at any time of day or night, while stock exchanges have limited hours on weekdays. This is one of the most common differences between both financial assets.
Further, owning crypto is very much like owning any asset or property. Users can exchange it for other cryptos, send it to their crypto wallet, or even stake it to generate more rewards. In addition, it could be used as a medium of exchange. For instance, Bitcoin has been declared legal tender in some countries.
Another key difference between both asset classes is their 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. However, the stock market doesn't experience as much volatility as the crypto market. This is because the crypto market is relatively new and there is price discovery being made on a daily basis.
Should I invest in cryptocurrency or stocks?
Either asset is a good way to diversify your portfolio. Buying crypto or stocks largely depends on the individual and their investment strategy. Both asset classes have their advantages and limitations. The decision ultimately comes down to the investor's risk tolerance and preferences.
One key metric that investors utilize in order to invest in an asset is an investor's ability to wiegh on the risks and rewards and not the investment vehicles that they use. Many experienced investors diversify their portfolios, getting exposure to both cryptocurrency and stocks.
Pros and cons of investing in cryptocurrency
Pros
Accessible: Crypto is borderless, and anyone with an internet connection can use it.
Decentralized: Cryptocurrencies are typically not centralized, keeping them immune to censorship and centralized control. Most cryptocurrency systems don’t rely on a central authority, making crypto resistant to censorship and centralized control.
Inflation-resistant: Cryptocurrencies aren’t directly influenced by central banks’ monetary policies. Therefore, 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. Some cryptocurrency projects can issue more coins, so it is important to always DYOR.
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. Popular decentralized exchanges like Pancakeswap offer this to investors.
Diversity: The value of many tokens is not just monetary. Many of the tokens have far more utility than just being a store of value. For one, Fan Tokens can provide token holders with exclusive benefits from their favorite sports team. Some cryptocurrencies are used as governance tokens, which give holders the right to participate in the decision-making process for the respective project. Ethereum, for instance, is a smart contract platform that markets ETH as gas for the underlying projects while XRP help facilitates bank facilitate transfers between different geographies.
Profits: Cryptocurrency is a great way to earn substantial profit due to appreciation. Although volatile, it is the only investment asset that has appreciated substantially over the last decade, even reaching 2 trillion.
Cons
Price volatility: The crypto market is famously known for its dramatic price swings. The potential for quick gains can be very attractive to new investors. However, they should be aware that its flipside is the potential for equally dramatic losses that can occur in the next second.
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.
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.
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.
Pros and cons of investing in stocks
Pros
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.
Regulated: Many governments heavily regulate the stock market. For example, in the US, publicly traded companies must disclose information that can impact their stock value to the Securities and Exchange Commission (SEC) — a government oversight agency in charge of investor protection.
(Somewhat) Inflation-Resistant: Certain types of stocks, such as Treasury inflation-protected securities (TIPS), can act as a hedge against inflation.
Diversity: There is a wide selection of stocks across different industries and sectors 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.
Cons
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. Furthermore, some stocks may be more volatile than others. For example, the value of growth stocks tends to fluctuate more than that of blue-chip stocks that represent shares in established companies with flawless reputations.
Higher fees: It is common for stock exchanges to charge high transaction fees and there are a greater number of them as compared to cryptocurrency trading. On top of brokerage fees and commissions, there are also other charges when you purchase or sell your stocks. Some stock exchanges have moved away from this model, however generally speaking it's been widely adopted by many stock exchanges to charge for transactions.
Returns not guaranteed: Stocks are no different from any other financial market. Even though there are stocks that often outperform alternatives, in the long run, there is a possibility that they may not do as well during a short investment period.
Final thoughts
Crypto and stocks are two different investment assets that have appealed to many investors.
While there are many differences between these two assets, they have many similarities.
Stocks and crypto are significant investment assets that can serve different purposes for your portfolio. No matter which one you choose, always make sure you are aware of the associated risks and DYOR.
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