Cryptocurrency vs. Stocks: What's the Better Choice?

Cryptocurrency and stocks are two different types of financial assets. Both represent a different asset class, with different levels of risk, volatility, and investment horizon.

Cryptocurrency has taken the world by storm. The market of cryptocurrency further caught fire when its market cap peaked at $ 3 trillion in 2021. Today, the total value of all these digital currencies is around $ 1.17 trillion, according to CoinMarketCap.com.

While the rapid success of cryptocurrency has made many investors rich, it has also many questions about the durability of this success.

Whereas, stocks have a very long history and represent ownership in a particular company. While they are also proven to be volatile, this volatility is controlled and limited with upper caps and lower caps on the trading floor.

It is always advised to be very clear about the investment choices investors make. Let’s explore both cryptocurrency and Stocks.

What are Stocks?

Stocks represent ownership in the company. They are a fairly good investment option because they are backed by the company’s assets and cashflows.

A stock price moves as investors assess the future success of the company. While investors may become overly optimistic about the stock in the short term, the stock price ultimately depends on the company’s ability to grow its profits over the long term.

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Pros of Investing in Stocks

Stock investment offers plenty of benefits:

Investors can take advantage of a growing economy: As the economy grows, so do corporate earnings. And higher stock prices rise
Stock investment is one of the best ways to stay ahead of inflation: Historically, over the long term stocks have yielded a generous annualized return.
Stock trading is very easy. Investors can easily purchase shares via a broker. And opening a stock trading account is also very easy and quick.
Investors can start with a minimum amount. Not only investors can start with a low amount of cash, but they also have the option of purchasing fractional shares.
Investors can earn money with stocks in more than one way. Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate value. This leads to earnings via capital appreciation. Another way of income is dividends which offer a regular stream of income.
Stocks are one of the most liquid assets. Investors can sell their stock anytime during trade hours.

Cons of Investing in Stocks

Some risks in investing in stocks are:

The risk of losing the invested amount is always there. If a company is performing poorly, investors will sell, sending the stock price plummeting.
In case of bankruptcy, common stockholders are last to receive any compensation for their invested amount. And that too at the risk of if there are assets available after paying off the compulsory debts.
Stock trading is time-consuming. If investors want to enjoy good returns, they have to stay up to date with the market trends, company reports, economic reports, etc. Also, they will have to monitor the stock market itself, as even the best company’s price will fall in a market correction, a market crash, or a bear market.
If investors sell their stock for a loss, you may be able to get a tax break. However, if you sell your stock for a profit, investors are liable to pay capital gains taxes.

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What is Cryptocurrency?

Cryptocurrencies are digital assets that have no physical backing of assets or cash flows. One of the most popular cryptocurrencies is Bitcoin which has a market cap of $ 565 billion.

Since cryptocurrency is not backed by assets or cash flow, the only thing that drives crypto prices is speculation driven by investor sentiment. As investors take interest and buy more of any cryptocurrency the price rises. And vice versa.

Pros of Investing in Cryptocurrency

- Inflation Protection -Due to inflation, the value of many currencies declines. Many folks see cryptocurrency as offering protection against inflation.
- Investors enjoy the fast transactional speed with cryptocurrency. Cryptocurrency transactions are done in a matter of minutes and that is appealing to many.
- Cost-Effective Transactions – Cryptocurrencies can help transfer funds globally. The transactional cost with the help of cryptocurrency can be minimal or zero. It is negligible as it eliminates the need for third parties like VISA to confirm transactions.
- Decentralization – Cryptocurrencies are a portrayal of a brand-new decentralization model for money. They also help to combat the monopoly of a currency and free money from control.

Investors offer ease of Accessibility. 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.

Cryptocurrencies have a 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.

Cryptocurrency trading offers anonymity. There is no third-party intervention due to which your account has a level of privacy. On the blockchain, investors have an identifier and your wallet address as the transactions are pseudonymous and nothing personal about you.

Cons of Investing in Cryptocurrency

Investing in cryptocurrency has attractive features which are appealing and profitable. But investors should not forget its downsides:

While cryptocurrencies claim to be an anonymous form of transaction, they leave a digital trail. And this digital trail can be easily traced by the authorities if the need arises.
The majority of blockchains work on the proof-of-work consensus mechanism. Network participants are required to use powerful ASIC computers and the right hash to make a block added to the network. Due to this, there is excessive power consumption and countries are taking majors to lower its impact on the environment.
The lack of regulations and authorities managing control is a big drawback. The no refund or cancellation policy can be considered the default stance for transactions wrongly made across crypto wallets and each crypto stock exchange or app has its own rules.
Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
Though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in the theft of millions of dollars in coin

Similarities between Cryptocurrency and Stocks

Cryptocurrencies and stocks have some very similar mechanics. Trading of both these assets is similar. In the vase of cryptocurrency, buyers are matched to sellers of digital assets, and the price is determined by supply and demand. Similarly, the buyers of stock come to sellers on the trading floor and the demand and supply have a huge impact on price.

Transactions of both can be done online, and both investments can build wealth or lose it. The trading interface of both cryptocurrency and stocks are similar. Investors can submit similar types of orders to exchanges in both markets. Market orders either buy or sell at the present market price. Limit orders include a predefined price at which the trader hopes to buy or sell. A stop-loss order works similarly to a market order. It only executes once a predefined price level is triggered.

Another similarity between the two is between stock day trading and spot trading cryptocurrencies. Stock market-based day trading capitalizes on short-term market movements to buy and sell stocks within the trading day of a market. Cryptocurrency markets never close. The same short-term trading strategies employed for stocks and shares are viable for cryptocurrencies. Intraday trading strategies like swing trading, range trading, scalping, and arbitrage all apply. Market volatility is the key to profitable day trades, and deep liquidity is preferred — two fundamental characteristics of many cryptocurrencies.

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Differences between Stocks and Cryptocurrency

Cryptocurrencies and stocks are two very different assets. Let’s look at the key characteristics that set them apart:

Ownership

To trade stocks, investors need a brokerage account. And that brokerage account is verified by all the legal information of the investor like address, Social Security number, signature, etc.

On the other hand, cryptocurrency offers more anonymity. There are no legal requirements to open an account to start trading cryptocurrency. Investors keep their coins or other digital assets in a crypto wallet, which can be fully virtual or it can exist on a USB drive. However, this anonymity comes with its unique risk which is exposure to hackers, and misplacing your hard drive which can lead to losing all your crypto assets.

Exchange

Stocks are traded at the exchange which have been in existence for centuries. Cryptocurrency exchanges, on the other hand, are fairly new. The largest one, Binance, launched in 2017. Coinbase, another major player, was created in 2012.

Liquidity

Stocks are considered more liquid because there are more active buyers in the stock market. Whereas, in the case of crypto, liquidity varies from one form of digital asset to another. Bitcoin is the most liquid digital coin with the highest trading volume.

Volatility

Volatility and risk are there for both crypto and stocks. Both these financial assets can rise up or fall down in value. Therefore, it is nearly impossible to time the market to know exactly the best time to buy or sell.

The stock market has a well-earned reputation for volatility. While the market does rise and fall but it yields an average return of 10%. Whereas, cryptocurrency is more likely to undergo sudden, drastic changes in value and sometimes without warning.

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Trading Costs

Every share traded has a transaction cost that the trader has to pay. Even if he trades multiple transactions per day, he/she has to pay a commission on every share traded. Even investors who purchase low-fee, no-load index mutual funds — which are essentially baskets of stocks — have to pay fees that cover the costs of running the fund.

While the fee of crypto trading is very low.

Technology

Many cryptocurrencies allow for programming to be added, changing the nature of the crypto asset into ‘programmable money. Other use cases can be built upon certain cryptocurrencies, such as smart contracts and other DeFi uses, like Dapps (decentralized applications). The only uses for stocks are capital appreciation, dividend cash flow, and voting rights.

Supply

Some cryptocurrencies are limited in their supply, the most famous being Bitcoin. However, some cryptocurrencies have no limit on how much they can be mined. Stocks, on the other hand, tend to be less variable, as the amount of shares outstanding is controlled and ultimately backed by the operations of the issuing company.

Regulations

Stocks and stock markets are regulated by regulatory authorities such as the Securities and Exchanges Commission (SEC). The regulation by those companies ensures a certain level of transparency in the publicly traded companies, cryptocurrencies remain largely unregulated.

Trading Hours

The stock markets have specific trading hours. They are open during business hours in their home country, Monday through Friday, and closed on holidays on weekends.

Whereas, the crypto market runs around the clock, every day of the year. The 24/7 availability of the crypto markets may be one reason why crypto is so volatile

Diversification

Cryptocurrency is believed to be a non-correlated asset. That means that this asset class doesn’t react to market events like traditional securities such as stocks and bonds. Some also believe that it could act as a hedge against inflation.

On the other hand, stocks provide a diversified portfolio of different industries and sectors all of which are correlated to factors like inflation, unemployment rates, and interest rates.

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Is Crypto a Better Investment than Stocks?

The answer to this depends on investors’ priorities. Cryptocurrency is a high-risk, potentially high-return investment. It can lead to big losses. But can also lead to quick substantial gains.

As an investor, if you prefer a long-term investment with less risk and the potential for relatively steady average returns over time, stocks could be your friend.

What is a better choice?

In order to decide, an investor has to be clear about the following things:

Risk Tolerance

Investing in the stock market is not risk-free. The stock market has proven to be volatile with huge changes in a single day. Political turbulence and general economic upheaval can also have a huge impact on the major stock indexes and they can lose value overnight.

On the other hand, cryptocurrency is known for its volatility. Since it is fairly new, its future highly depends on its acceptance.

So, investors need to decide the level of risk tolerance they can accept to better decide their investment.

Investing Horizon

Stocks are viewed as a solid long-term investment. Despite the volatility, in the long run, stock investment has proven to be profitable.

Whereas, cryptocurrency is not a long-term investment as it does not have a long history.

Conclusion

Investors do not necessarily how to choose between the two. Rather, it is advised to invest in both at the same time and build a good investment portfolio with diverse investment choices. Stocks can be good in the long run while cryptocurrency can give u a quick profit.

No matter which option you choose, it’s important to do your research before diving in. Never invest in stock before understanding their financial position. Also, never buy a digital coin just because there is a lot of hype about it. Spend time analyzing and assessing your choices which will not only give you confidence in your investment but also provide comfort.

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Cryptocurrency vs. Stocks: What’s the Better Choice?