Cryptocurrency and stocks are two of the most popular investment vehicles in the world. Both have the potential to generate profits, but they also represent very different asset classes and vary in a number of important ways. In this article, we will explore these key differences and help you decide which one is right for you.
A Bit of Context
The cryptocurrency market has witnessed a meteoric rise in recent years. At the time of writing, market capitalization sits at around $1.2 trillion, having peaked at an all-time high of $3 trillion in Nov 2021. Unsurprisingly, with these kinds of numbers flying around, cryptocurrencies have become an attractive investment option for investors the world over.
Stocks on the other hand, have been around for hundreds of years and are one of the stalwarts of the traditional financial system, still forming the mainstay of many investors’ portfolios to this day.
So, how do you know which one is right for you? Let’s explore the key differences between crypto vs stocks to find out.
What are Cryptocurrencies?
Cryptocurrencies are digital assets that use cryptography to secure transactions. Unlike traditional currencies, cryptocurrencies are digital currencies and are built on decentralized networks, which means they're not regulated by any central authority.
Bitcoin is the most popular and widely used cryptocurrency, but it's by no means the only digital currency out there. The modern crypto market is awash with different options for investors to add to new cryptocurrencies to their crypto holdings.
Read More In-Depth: The Complete Guide to Crypto | 2023 Edition
How are cryptocurrencies traded
Cryptocurrencies are traded in the same way as stocks and other financial instruments, in that they are bought and sold on exchanges, with their prices determined by supply and demand. Crypto investors can make money on the back of price volatility by buying low and selling high, or by holding onto their coins and hoping for the price to increase over time.
What are Stocks?
Stocks are shares of ownership in a company. All publicly traded companies have stocks and are allowed to list on stock exchanges. This helps companies raise money faster, however, some companies still choose to stay private.
Purchasing a stock involves buying a piece of that company and becoming a shareholder in the process. Shareholders receive a portion of the company’s profits, as well as the ability to exercise certain voting rights.
Stocks form what's known as the stock market, sometimes referred to as equity markets, and are regulated by an exchange commission - in the case of the U.S. that is the Securities and Exchange Commission, known as the SEC.
How are stocks traded
Stocks are traded on stock exchanges, the New York Stock Exchange being a prime example, and their prices are determined by the market. When investing in stock markets, investors, the same as with cryptocurrencies, want to buy low and sell high and in particular are looking for growth stocks - shares in companies whose stock price it's believed will outperform the overall market - to include in their stock portfolio.
Key Differences between Crypto and Stocks
There are several key differences between crypto and stocks that investors should be aware of.
The first difference is liquidity. Cryptocurrencies are much more liquid than stocks, as they can be bought and sold quickly and easily on exchanges. This makes them a better option for short-term traders who want to take advantage of market movements. Stocks, on the other hand, take longer to buy and sell and usually require a broker, although in recent times there has been a move make this process easier through technology.
Another key difference is fees. Cryptocurrency transactions are generally much cheaper than stock transactions, as there are no broker fees or commissions to take into account. This makes them more cost effective to trade and a more attractive option for investors who want to save money on fees. However, some companies are now looking to introduce fee-free stock trading platforms to help increase accessibility to stock trading.
For example, the Ethereum network also has its own network fee, known as a gas fee, in order for a transaction to occur.
Since each Ethereum transaction requires computational resources to execute, those resources have to be paid for to ensure Ethereum is not vulnerable to spam and cannot get stuck in infinite computational loops. Payment for computation is made in the form of a gas fee. —A quote from Ethereum.org on gas fee.
The third difference is regulation. There are no uniform international measures to regulate crypto, although different countries and regions have different approaches to taxation and such, we covered a list of crypto friendly countries that you can help with your research. This means that investors are exposed to more risk that they may not be aware of. As a result, there is a personal responsibility to learn how to protect one's own crypto assets and avoid crypto hacks. Stocks, on the other hand, are heavily regulated by governments and financial institutions, which makes them a safer investment.
Finally, there is the issue of volatility. Cryptocurrencies are well-known for their volatility, certainly much more than stocks. This means that their prices can fluctuate significantly in a short period of time. Whilst this can be beneficial for short-term traders, it can also be a bit of a risk for long-term investors.
Difference of Risks Involved in Investing in Cryptocurrency & Stocks
The risk involved in investing in cryptocurrencies and stocks is one of the most important factors to consider when making investment decisions. As we've just seen, cryptocurrencies are largely unregulated and subject to high levels of volatility. This makes them a much riskier prospect than stocks.
Unfortunately, cryptocurrencies are also much more prone to price manipulation and fraud, with high profile examples including the likes of FTX founder and CEO Sam Bankman-Fried charged with conspiracy to commit commodities fraud and securities fraud. This means it's crucially important to do your own research before investing.
Stocks, on the other hand, are relatively safe investments. They are heavily regulated and their prices are determined by the market. That's not to say that stock prices can't fluctuate over time and loose investors money though, of course.
Differences in Volatility Between Crypto vs Stocks
Cryptocurrencies are much more volatile than stocks. Their prices can fluctuate significantly in a short period of time. Although market volatility exists in all financial markets to some degree, a quick glance at the history of crypto will tell you this happens on a whole other level in crypto markets. For example, the price of Bitcoin rose by more than 2,000% in 2017, before receding back.
Stock prices, on the other hand, tend to be more stable and predictable. There is some level of market volatility, often driven by economic or policy-making factors, such as interest rate hikes, and governmental monetary policy, but it doesn't come close to what you see with crypto. Individual stock prices change along with an assessment of the potential future success of that company, and are ultimately dependent on the company’s ability to grow profits.
Market Capitalization of Stocks & Crypto
Market capitalization is another key factor to consider when investing. The market capitalization of a stock is the total value of all the outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion. Investors use market capitalization to determine a company's size, rather than looking at sales or total asset figures, as well as helping evaluate the growth potential and risk profile of different companies. Depending on your risk tolerance and individual goals, you can invest in large-cap, mid-cap, and small-cap stocks.
Cryptocurrencies, on the other hand, are not public companies and do not have a market capitalization in the same way. Instead, the market capitalization of cryptocurrencies is calculated by multiplying the total number of coins or tokens in circulation by the current market price. It gives investors an idea of how much money is being invested in the particular cryptocurrency, and can help them make more informed investment decisions as higher market cap may indicate higher demand and stability.
Pros and Cons of Investing in Cryptocurrency vs Stocks
There are pros and cons to investing in crypto vs stocks. Cryptocurrencies are generally cheaper and more liquid than stocks, and they can offer investors greater returns in a shorter period of time. However, they are also more risky and vulnerable to price manipulation and fraud.
Stocks, on the other hand, are generally safer investments. They are heavily regulated and their prices are determined by the market. However, they can also be volatile and are subject to market fluctuations.
Mix it up
Cryptocurrencies and stocks both represent legitimate asset classes for investors to invest in. The decision of which one to choose is really a personal one that comes down to your individual goals and risk tolerance.
It doesn't need to be an either-or decision, either. As you go about constructing an investment portfolio, both cryptocurrency and stocks, as well as other types of asset like bonds or funds, all have their place in the mix. Remember, one of the golden rules of investing is to diversify your portfolio so take that into account with your approach to portfolio management.
Not financial advice
This article isn't meant as investment advice, but rather to give you the information you need to make your own better informed decisions.
Are you considering investing in crypto or dabbling around stocks in the stock market? Let us know in the comments.