Crypto vs. Stocks: What Should I Invest In?

Stocks and Crypto are very different investment options. They both represent an entirely different segment of the financial industry. Let’s shed light on both these investment vehicles and then discuss which is a good option to invest in.

What are Stocks?

Stocks represent ownership in the company. With every share, the shareholder owns a percentage of ownership in the company. They are assets bought and sold at the stock market. Stocks are one of the oldest and most well-establish investment vehicles with both long-term and short-term gains.

Pros and Cons of Investing in Stocks

Every investment vehicle comes with its set of benefits and drawbacks. Therefore, it is very important to understand both before investing your money. Let’s discuss both

Pros of investing in Stocks:

High Potential Profits – One of the prime benefits because majority of the investors choose to invest in stocks is its potential to yield returns higher than other investment vehicles. The average return of bonds, CDs, and other similar investment options is less than the average return stock provides.
An Inflation hedge – Historical records have proven that the stock market return outpaces the inflation rate significantly. Stocks have been a good way to hedge against inflation.
Source of a regular passive income – With stocks investors can also earn dividends. Some companies pay monthly dividends, some pay quarterly and some pay yearly dividends. Dividend income is an excellent source of passive income.
Ownership in the company – With stock investors become part owners of the company, depending upon the number of shares they own.
Diversification – stocks are an excellent source of introducing diversification in the investor’s portfolio. With stocks, investors can invest in a diverse range of industries which can reduce the overall risk of the portfolio and improve returns.
Start from as low as $ 1 – With stocks investors can start with as low as $ 1. With zero commission-based trading nowadays, investors can start with a minimal amount of money and begin their journey of trading.

Cons of investing in Stocks:

Risk of losing money – Stocks also have the potential for huge losses. Investors can even lose their invested value if the company persistently performs poorly.
In case of bankruptcy, stockholders are the last to get paid. And this also depends on any resources left to pay common stockholders.
Not everyone can do their research about the best companies themselves. Also keeping up to date with the ongoing trends of the stock market is not everyone’s cup of tea. Therefore, they have to hire stock managers to manage their accounts which is an additional cost.
Taxes – All profits on stock investment are taxable which has a huge impact on the take-home profit of the investors.

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How to diversify with Stocks?

Here are some ways an investor can diversify their stock investments:

Investors can diversify by investment type. A mix of stocks, bonds, and commodities will provide most of the benefits of stock investments and fewer disadvantages.
Investors can diversify their investments by the size of the company. There are companies categorized as large-cap, mid-cap, and small-cap companies. It is the total stock price times the number of shares. It’s good to own different-sized companies because they perform differently in each phase of the business cycle.
Investors can invest in companies with different locations. This allows investors to benefit from the growth potential of different countries without staying dependent on one geographical location.
Investors can diversify by investing in Mutual Funds and ETFs. Owning mutual funds or exchange-traded funds (ETFs) gives instant diversification to investors by owning hundreds of stocks selected by the fund manager.

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What is Crypto?

Cryptocurrency is a type of digital asset that is created and stored digitally, using blockchain technology. They can be used as a medium of exchange and a store of value.

Crypto is a fairly new investment vehicle with high price volatility and risks.

Pros and Cons of Investing in Crypto

Every investment vehicle comes with its set of benefits and drawbacks. Therefore, it is very important to understand both before investing your money. Let’s discuss both

Pros of investing in Crypto:

Privacy – Cryptocurrency has mechanisms that protect the identities of users. The use of pseudonyms allows users to remain anonymous as they transact.

Cost Effective – Transaction fee in the case of crypto is relatively low. Also, the elimination of third parties allows investors and users to make considerable savings.

Increasing popularity – Many established investors are taking increased interest in cryptocurrency as they are recognizing the financial perks associated with it. Also, crypto has continued to experience a steady rise in value. Given the high level of security measures adopted as well as the relatively low costs of the transaction, crypto is a viable investment option.

A simple decentralized system – A decentralized system means there is no central authority to back up transactions. Instead, the cryptocurrency is run on a network across different computers.

Transaction Speed – Cryptocurrency transactions are done in a matter of minutes which appeals to the majority of its investors.

Ease of access – Investors just need a computer or a smartphone with an internet connection to use cryptocurrency. There’s no identification verification, credit check, or background to open a cryptocurrency wallet. It is way faster and easier compared to old financial institutions.

Transparency – Due to the decentralized nature of blockchains, investors can view the money transfer transactions by simply using blockchain explorer on the platform to track live transfers. This open and transparent system is a relief among investors and is corruption-free.

Cons of investing in Crypto:

Risky and Volatile – Cryptocurrencies are one of the most volatile investments with continuous price fluctuations and the risk of losing the entire invested amount in less than a day. This is because crypto relies on demand and supplies to determine market value. And those who chose to use crypto as a store of value should be extra vigilant when the market fluctuates.
No regulations – With no regulatory authority to regulate the crypto market, crypto investors are exposed to fraud, theft, and hacking.
Risk of hacking – Since these are digital assets the risk of cyber threats is also very high. And it can lead to disastrous results.
Excessive power consumption – Blockchains work on the proof-of-work consensus mechanism. Network participants are required to use powerful ASIC computers.

How to diversify using Crypto?

Here is how to diversify your crypto portfolio:

Invest in cryptos with different use cases, or purposes. Bitcoin is an excellent store of value that can be used to preserve and grow wealth. Whereas, Ethereum, has smart-contract functionality that allows the creation of digital programs, so this is an investment in a blockchain network where decentralized applications, or dApps, can be built. In addition to the above, crypto investors can also invest in stablecoins that have been pegged to an underlying asset such as fiat currency.
Invest in different cryptocurrency blockchains. Blockchains not only allow cryptocurrencies to function, but they also provide great technological solutions. For example, Ethereum blockchain facilitates the execution of agreements without a third party and allows dApps to be built on its platform; Cardano (ADA), focuses on security, scalability, and efficiency; EOS (EOS) blockchain specializes in web services, such as cloud storage, dApps and smart contracts.
Investors can diversify by market capitalization – While cryptocurrencies with a big market cap like Bitcoin offer stability and strong fundamentals; a cryptocurrency with a small market cap might offer strong growth potential.
Investors can diversify by location – Choosing cryptocurrency projects from different places around the world can expose you to a wider variety of innovations by crypto businesses.
Investors can diversify by investing in cryptocurrency found in different industries. The finance industry is the place where crypto has been most adopted. Also, Crypto’s popularity has increased in the world of video games. A growing number of users are trading virtual assets in a global virtual marketplace.
Investors can diversify by investing in different asset classes in the crypto market. The most common asset class encompasses Bitcoin and Ether (ETH). Another asset class is utility tokens, which give users the right to use a product on a certain platform. There are other forms of digital asset classes which include Basic Attention Token (BAT), Golem Token (GLM), and Filecoin (FIL). Non-fungible tokens, or NFTs.
Investors can diversify by the risk level different coins offer. For example, Bitcoin and Ethereum are less risky cryptocurrencies. The newly introduced currencies are the riskiest and can also provide growth potential

Major Differences between Crypto and Stocks

To decide which investment option is better, understanding the differences between the two is the first step.

Here we have discussed some of the few most important differences between the two:

Huge Exposure and Diversity

Stocks and Crypto both offer thousands of potential investment options.

There are thousands of companies listed on different stock exchanges for example the New York Stock Exchange and the NASDAQ. An investor can pick any company to invest as much money as he wants.

The crypto marketplace also has more than 12,000 cryptocurrencies to choose from. But the majority of the investment lies in one single cryptocurrency that is Bitcoin. This one asset dominates the crypto market and controls the overall trends in the market.

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Whereas, the stock market has no such dominance. There are a few top companies in the stock market commonly known as the FAANG stocks. But its dominance is not like Bitcoin.

Volatility

Without a doubt, cryptocurrency is one of the most volatile assets. The value of the cryptocurrency can substantially increase in value in a single day. And similarly, it can lose all its value in less than a day.

Stocks on the other hand are less volatile in nature. There is a limit to the amount otock can incur in a day, and similarly, there is a cap to the amount of profit a stock can make in a day.

Types of Profit

Stocks generate profits of two types: Capital Gain and Dividend. Investors can buy and hold their investments for a good period of time and sell at a higher price making a profit. This is capital gains. Also, shareholders can invest in shares for the long term and collect quarterly and yearly dividends.

Whereas, cryptocurrency only yields profits in the form of capital gains. Investors can buy at one price and sell at a profit.

Profit source

The price of a stock depends on the overall market trend and the company’s performance. Investors can run fundamental analyses on a company’s stock to evaluate the worth of the underlying company regardless of the market dynamics.

On the other hand, cryptocurrency has no underlying asset to back off its value or stabilize it. Its ultimate value is the amount the next buyer is willing to pay. And investors can only run technical analysis to evaluate a value.

Trading and Regulation

Stocks are one of the most heavily regulated assets. Stocks are traded on a handful of large centralized exchanges which are regulated by authorities.

Cryptocurrencies, on the other hand, have no centralized exchange system. Instead, a network of hundreds of independent companies run their own small exchanges where individuals trade cryptocurrencies among themselves. There are no dominant players in this market. This means that cryptocurrency is traded among individuals.

Unlike the formalized stock exchange system, where shares are traded through a system, cryptocurrency is traded directly between the buyer and seller.

Scams and Frauds

Cryptocurrency remains largely an unregulated asset class. Estimates suggest that roughly a third of all new cryptocurrencies introduced to the market are fraudulent in some way. Most are either traditional pump-and-dump schemes or cash grabs for an asset that will never be released.

Whereas, there are no such chances of scams and fraud in the case of stock trading.

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Invest in Cryptocurrency or Stocks?

Both cryptocurrencies and stocks can be used by investors to build wealth. Yet, investing in stocks is different from investing in crypto. Stocks are well-established investment vehicles with a decades-long history of continuously improving. Whereas, cryptocurrency is just a baby slowly expanding its arms within the investor world.

Both asset classes have their advantages and limitations. The decision depends on your risk tolerance and other preferences. Stocks are less risky and volatile while crypto is one of the most risky and volatile investments. Also, stock trading has a complete system that is regulated by authorities. Whereas crypto does not even require a brokerage account and it’s free from all regulatory authority. Profits from stock trading are good and can be consistent. Whereas, profit from trading in crypto can be substantially huge but inconsistent. Stock prices are hugely dependent on how the company is performing. While the price of cryptocurrency is determined by demand and supply.

There is no denying the fact that both crypto and stocks are valid investment choices, and they can serve different purposes in your portfolio.

Investing in crypto is risky and you might spend more time worrying about the security of your cryptocurrencies than your stock investments. If you have no experience of investing you should not start with crypto. Instead, stock investment is a safe and more secure investment to start your trading journey.

No doubt the crypto marketplace is full of challenges since it’s fairly new. But it also offers new opportunities that do not yet exist. While it is an unregulated market, regulations are on their way, but it’s too early to tell what the final regulatory structure and the future of cryptocurrency will look like. On the other hand, the stock market continues to evolve at a slower rate but its secure and less challenging.

While the ultimate decision is of the investor, we believe in order to have a good yielding portfolio invest a major chunk of your portfolio in stocks. And keep on exploring the cryptocurrency market with a smaller chunk of your portfolio. Whereas, if you are a risk taker and a pro-investor you can choose to invest a bigger amount in cryptocurrency

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