Cryptocurrency vs stocks which is better? This question might be on your mind, especially when you think about investing. You may wonder if you should put your money into cryptocurrency or stocks. Both options have pros and cons that you should consider before deciding. This article will compare cryptocurrency vs stocks, so you can better understand each option and make an informed investment decision in financial management for your future.
The impact of cryptocurrency on stock market is huge. Cryptocurrency has become a significant player in the financial market in the last couple of years. According to Bloomberg, the combined value of digital currencies is around $2 trillion. Of all the cryptocurrencies, Bitcoin remains one of the most popular digital currencies, worth over $800 billion. As a result, many investors have been swarming into the cryptocurrency rush, like a digital gold rush.
On the other hand, stocks are a more traditional investment option. They are issued by companies and can be bought and sold on stock exchanges. The total value of all stocks in the US is about $47 trillion. When you invest in stocks, you own a piece of the company and become a shareholder.
Before making your investment decision, you should know some key differences between cryptocurrency vs stocks.
Cryptocurrency vs Stocks: Which Should You Consider Investing In?
Regarding cryptocurrency vs stocks, both options have pros and cons that you should consider. To be a savvy investor, you need to understand precisely what you are investing in.
You need to ask yourself what pros and cons exist for you in cryptocurrency vs stocks and then weigh all of the risks and the rewards and consider exactly what will ultimately drive the success of the investment. Without the ability to determine what will drive the success of the investment, you’re not investing; you’re gambling.
Stocks: Defining Stocks and How They Work
A stock is a security that represents ownership in a corporation. When you buy stocks, you become a company shareholder, and your shares give you a claim on the company’s assets and earnings. Investing in stocks can provide you with the potential to earn dividends and capital gains. Dividends are payments made to shareholders from the company’s profits, and a capital gain is an increase in the stock’s value.
For example, imagine you buy shares in Apple at $100 per share. After holding the stock for some time, you decide to sell when the price reaches $120 per share. You would have made a $20 per share capital gain in this case. If Apple had also paid a dividend of $2 per share while you held the stock, your total return would have been $22 per share or 22%.
The purpose of a company is to make money for its shareholders. When companies do well, their stock prices usually go up. When they do poorly, stock prices may fall.
Stock prices are determined by the stock market laws of supply and demand. When more people want to buy stock than sell it, the price goes up—the price decreases when more people want to sell a stock than buy it.
Investors can quickly lose sight of that fact, especially when they become overwhelmed by fluctuating stock prices and profit potential. It’s important to remember that a stock is not just a number on a screen but rather partial ownership in a business.
Because it represents a stake of ownership in a particular business, a stock will give the shareholder a claim to the cash flow and the assets the stock represents. These assets back the investment and form the basis for its overall valuation.
Cryptocurrency: Defining Cryptocurrency and How it Works
Cryptocurrency is digital money. It is created using code and exists only electronically. Cryptocurrencies are decentralized, which means they are not subject to government or financial institution control. Bitcoin, Ethereum, and Litecoin are all examples of cryptocurrencies.
Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services. Cryptocurrencies are held in digital wallets, and like physical cash, they can be used to make purchases or exchanged for other currencies.
The price of cryptocurrencies is based on supply and demand. The price goes up when more people want to buy a cryptocurrency than sell it. The price decreases when more people want to sell a cryptocurrency than buy it.
Unlike stocks, however, cryptocurrency often allows crypto owners to use the currency in ways much like more traditional currencies, like using crypto to purchase goods and services, sending money to others, or utilizing smart contracts that automatically execute under specific conditions.
Bitcoin, for example, can be used to purchase goods and services from a growing number of vendors. While Ethereum’s primary use case is as a decentralized platform that runs smart contracts, it is also being used increasingly as a currency.
While stocks represent partial ownership in a company, cryptocurrency represents digital ownership of a currency unit. Crypto “coins” or “tokens” are cryptocurrency units that derive their value from the demand for the currency.
Cryptocurrency vs Stocks: Key Differences
Now that you understand how stocks and cryptocurrency work, let’s take a closer look at the key differences between these asset types.
The first key difference between cryptocurrency vs stocks is in the nature of the asset’s value.
A stock’s value is derived from the underlying company. When you buy a stock, you buy partial business ownership. The value of your shares is based on the company’s overall value, which is determined by its cash flow, assets, debt, and profitability.
Cryptocurrency, on the other hand, is not derived from anything tangible. You might have questions in your mind, like, what are the benefits of crypto? Cryptocurrency value is based solely on supply and demand. There is no physical underlying asset. The value of a cryptocurrency unit is based entirely on how much people are willing to pay for it.
Another key difference between cryptocurrency vs stocks is the volatility. Stock prices are relatively stable. They may go up or down a bit day-to-day, but by and large, they don’t fluctuate wildly.
Cryptocurrency prices can be incredibly volatile. This volatility is because cryptocurrency is not backed by anything tangible. The value of a cryptocurrency unit is based solely on what people are willing to pay for it at a given moment.
Another key difference between stocks and cryptocurrency is in governance. Stocks are subject to government regulation. This includes things like financial reporting requirements and securities laws.
Cryptocurrency is not subject to government regulation. Because cryptocurrencies are decentralized, no central authority oversees the currency. This lack of regulation makes it very difficult to track down people who use cryptocurrency for illegal purposes.
The basic process of buying and selling both stocks and cryptocurrency is similar. You find a broker or exchange that offers the asset you want to buy, and then you trade cash for the asset.
However, some key differences exist in how stocks and cryptocurrency are traded. Unless you demand a printed stock certificate, your stock broker will usually act as the custodian of your holdings. For some cryptocurrencies, investors prefer to take their digital coins off the central brokerage platform and use a cold wallet for complete control.
A time horizon can best be defined as the time you need to see a return on a particular investment. It is a crucial criterion when considering how best to invest your money. The shorter the timeline you need for a return, the safer the investment that you make should be. The reason? It needs to be there for you when you need it the most.
The bottom line is that the more volatile your investment is, the less suited that investment is for anyone with a short time horizon. As a general rule, most investment experts agree that risky investments will need at least a three-year window to ride out any volatility in the market.
Cryptocurrency vs Stocks: Pros and Cons
Now that you understand the key differences between stocks and cryptocurrency, let’s look at each asset type’s pros and cons.
Cryptocurrency: The Pros of Cryptocurrency Investment
There are reasons cryptocurrency has become a significant player in the financial market in the last couple of years.
The possible hedge vs. fiat currency
Some investors are drawn to the decentralized nature of cryptocurrencies. Cryptocurrencies are not currencies controlled by governments or central banks that have no problem printing money and generating inflation around fiat currencies, which are monies backed by governments. For example, the euro and the U.S. dollar are fiat currencies. Many investors who are drawn to cryptocurrencies call crypto “digital gold” because they operate under the belief that it will ultimately protect them against rising inflation.
The potential for significant gains
Investors who buy cryptocurrencies are drawn to the potential to earn high profits on their investments. Of course, several cryptocurrencies have seen their value skyrocket following their introduction. These historic gains are usually the main driver behind investors attracted to crypto. However, it is essential to note that this potential for significant price appreciation will come with considerable risk.
There’s a steady, increasing number of available cryptocurrencies
During those earliest days of cryptocurrency investment, a person could invest only a handful of coins. However, the continued speculative interest in cryptocurrencies has changed all of that. These days, new cryptocurrencies are being introduced regularly. Today, there are thousands of cryptocurrencies that you can invest in.
There is broad interest in using digital currencies as a form of payment
There currently seems to be an ever-growing interest in cryptocurrencies, both from an investor standpoint and among companies and even governments. Tesla, for example, is well-known for holding Bitcoin on its balance sheet. The company even briefly accepted Bitcoin as a form of payment before they reversed course. In 2021, El Salvador adopted Bitcoin as a legal tender. However, the International Monetary Fund continues to urge the government there to reverse that decision. Many cryptocurrency investors see this increase in digital currency acceptance as a positive sign.
Cryptocurrency: The Cons of Cryptocurrency Investment
Of course, with any investment, there will be risks. Here are some of the primary risks associated with cryptocurrency investment.
Cryptocurrency is extremely volatile
Cryptocurrencies have consistently displayed extreme volatility throughout their young existence. Because they are not backed by anything, which separates cryptocurrency from stocks, the price they trade at will always be determined by whim. There’s no way to tell where a particular coin might be traded next. There are fortunes to be made quickly and lost just as quickly when it comes to cryptocurrency in cryptocurrency vs stocks.
Cybersecurity risks are associated with Cryptocurrency
While cryptocurrency enthusiasts will tout its security benefits, there have certainly been many well-documented, notable hacks. Often, it can be difficult for investors to recover these stolen funds in these cases.
Cryptocurrency has no intrinsic value
The bottom line is that cryptocurrencies technically have zero intrinsic value. That means that any underlying earnings or assets do not back cryptocurrencies in the same way stock investments are. You see, a stock has value because it holds future earning power and a potential for a return on investment. Unfortunately, cryptocurrency offers nothing of the sort.
Cryptocurrency comes with a significant regulatory risk
Just because El Salvador embraced Bitcoin as a legal tender doesn’t mean that other governments will follow in its footsteps. Most governments are a lot more skeptical when it comes to cryptocurrency. For example, China has outright banned cryptocurrencies altogether, and there is speculation that other countries might follow suit.
Stocks: The Pros of Stock Investments
Now that we’ve looked at some of the cons of investing in cryptocurrency, let’s look at some of the pros of investing in stocks.
Stocks have a long, proven history of providing a solid return
Stocks have a solid, proven track record showing a substantial investment in returns. For example, on average, the S&P 500 returns about ten percent in the long term. Although stocks may be volatile, at times, over the short term, they’ve generally been a safe investment when held over a long period.
Stocks have an intrinsic value
As we mentioned, a stock investment represents an ownership interest in the company behind the stock. Over time, its value will ultimately depend on the success or failure of that underlying company. Because companies have assets that ultimately produce cash flow and earnings for their investors, they create what is known as an intrinsic value.
Stocks are an accessible investment
It is now easier than ever for the average person to invest in the stock market, thanks to the many online brokers who have cut their trading fees down to a price that is next to nothing. Anyone with a bit of money can invest in individual stocks or purchase diversified stock investments through index funds. An index fund helps lower costs while building a highly-diversified portfolio, even when you don’t necessarily have a lot of money to spend at the outset.
Stocks come with much stronger regulations
Heavy government regulation for stock exchanges, stockbrokers, and the companies they represent. Companies must provide certain regulatory information to protect the company’s investors, thanks to the Securities and Exchange Commission. While no regulatory body will be perfect, the bottom line is that stock investments have been around for quite some time. There are many regulations to protect investors, making them the safe choice for cryptocurrency vs stocks.
Stocks: The Cons of Stock Investments
While there are many advantages to investing in stocks, there are also a few disadvantages to keep in mind.
Stocks can be volatile
When investors hold a broad range of stock investments through an index fund, their stock investments will be far less volatile than investments in cryptocurrencies. There is the potential for individual stocks to be volatile, of course. However, they are typically less volatile than a cryptocurrency investment. Since there is a volatility risk that comes with stock investments, it is best to hold stocks as a part of your longer-term investment strategy, giving you ample recovery time when you are faced with short-term losses that may arise.
There is a lower potential to see more extreme gains with stocks
When it comes to broad stock indices, such as the S&P 500, an investor has far less potential to realize any extreme gains. With cryptocurrencies, on the other hand, extreme gains are often quite common. In the long term, stocks average a return of approximately ten percent. However, cryptocurrency investments are common to gain ten percent in one day.
Crypto vs. stocks: The Future of Investment
So, which is the better investment between cryptocurrency vs stocks?
The answer may depend on your individual goals and risk tolerance. For those willing to take on a bit more risk for the potential of higher rewards, cryptocurrency may be the better investment.
For those looking for a more reliable investment with a long-term focus, stocks investment may be the better choice. No matter what you decide, be sure to do your research and invest responsibly.
5 Expert Tips Before You Start Investing
Cryptocurrencies are still a new and volatile asset class. As with any new and volatile asset class, it is important to approach cryptocurrency investments with caution and discipline. When investing in cryptocurrencies, be sure to:
1. Diversify your investments
Don’t put all of your eggs in one basket. When investing in cryptocurrencies, diversify your investment across various coins. This will help you mitigate the risk associated with any one particular coin.
2. Do your research
Investing in cryptocurrencies is risky. Do your research before investing any money in this new asset class.
3. Create a long-term strategy
Cryptocurrencies are a long-term investment. When creating your crypto investment strategy, keep a long-term time horizon in mind.
4. Understand the risk
Cryptocurrencies are a volatile asset class. Be prepared for the possibility of losses, especially in the short term. Risks are inherent in any investment, so understand the risks associated with cryptocurrency (and stocks) investing before you put your money at risk.
5. Have a risk management plan
As with any investment, it is important to have a risk management plan in place. This will help you stay disciplined and prevent you from making impulsive decisions that could jeopardize your investment.
Cryptocurrency vs Stocks: The Bottom Line
In the case of identifying the best investment between cryptocurrency vs stocks, Both cryptocurrency and stocks have their advantages and disadvantages. You must consider your individual goals and risk tolerance when deciding which is the better investment. Those willing to take on more risk for the potential of higher rewards may find that cryptocurrency is the better investment. Those looking for a more reliable investment with a long-term focus may find that stocks are the better choice.
Indeed, several cryptocurrencies have seen their prices soar since they were introduced in the past few years. However, it is imperative that investors completely understand what it is that they are investing in. Do not rush into crypto (or any other investment, for that matter) simply because that’s what other traders are doing.
While many investors have enjoyed significant return on cryptocurrency, plenty of investors have made the same great returns even without it. It is also important to remember that some investors, including legendary investors like our old friend Warren Buffett, refuse to touch cryptocurrency, even with the proverbial ten-foot pole. That is something to consider before pulling the trigger on cryptocurrency investment.