While cryptocurrencies were designed to provide the world with a digital payment system (at its core), it has regularly been treated as an investment option. And with cryptocurrencies taking the world by storm over the last several years, growing into an almost $3 trillion industry, many investors are questioning the validity of stocks in their portfolios.
The goal of any investment is to get the maximum gains with a minimal amount of risk, and unfortunately, cryptocurrencies haven’t yet ticked this box. As an emerging market subject to volatility (let’s not forget gold went through years of volatile trading before becoming the “stable” asset it is known as today), cryptocurrencies have been labelled as a “high risk” investment.
Here we explore the difference between cryptocurrency and stocks to determine their fundamental differences and understand why investors might choose one over the other.
Cryptocurrencies vs Stocks
Looking at their most rudimentary differences, stocks represent an ownership interest in a business (which is backed by the company’s cash flow and assets) while cryptocurrencies’ values are generally determined by supply and demand.
Another obvious difference is that while stocks have been around for decades, having a long term track record, while cryptocurrencies only emerged a little over a decade ago. Despite being a new-age asset, the crypto industry has amassed an impressive market value in that space of time. The first of which, Bitcoin, has already seen ROIs above 42,000%.
Below we explore several other factors that differentiate cryptocurrencies and stocks apart from each other.
As briefly mentioned above, when an investor buys stocks in a company they are receiving a small piece of that company (relative to the amount of stock they purchase). While one can easily trade derivatives of stocks, owning stock requires getting the actual paper stock.
Acquiring cryptocurrencies is a much easier process, and once you have bought them they are yours to keep. Users are given the sole responsibility of storing them, safeguarding the private keys which grant such ownership.
When it comes to governance, stocks are controlled by the companies selling them (or the company managing the derivatives) while cryptocurrencies are entirely decentralized, meaning that no company, financial institution or government is running its operations.
While federal agencies (like the Securities and Exchanges Commission (SEC) in the United States) have authority over entire stock markets to protect fair trade, cryptocurrencies disperse governance across a network of computers around the world that follow a specific protocol.
Currently, there is no formal regulation on cryptocurrencies, however, this is likely to change in the coming months (and that isn’t a bad thing).
While the crypto market is subject to well-documented dramatic price swings, the stock market is also prone to price swings but generally on a much lower scale. As stocks are directly linked to companies that are required to publicly disclose how they’re performing and what they foresee in the upcoming future, stocks provide investors with a “glimpse” into possible upcoming volatility.
Stock prices fluctuate based on the performance of a company. If the company does well, the price will increase, while if the CEO gets caught up in a scandal, the price might go down considerably.
Cryptocurrency prices tend to move with market sentiment, with increases and decreases in value caused by supply and demand.
Stock markets are traded during the business hours of the country in which it operates. Each day the markets open and close at a particular time, allowing traders to open and close positions as they see fit. Cryptocurrencies on the other hand never close and operate 24/7.
Stocks provide a tool for investment, allowing traders to earn gains based on the stock prices’ activity. Cryptocurrencies also provide a store of value, however, they also provide plenty of other use cases. Bitcoin for example was designed to provide a digital medium of exchange while Ethereum was created to allow development within the blockchain industry.
What To Consider Before Investing
Before you decide to enter the digital gold rush or perhaps decide to diversify your crypto portfolio, here are a few things to consider: risk, time and management.
Stock prices can rise and fall as dramatically as crypto, however, this tends to happen over a much longer period of time (a stock price might rise 100% in a year, but fall as greatly in the same space of time).
The same can be said about cryptocurrencies, be wary of dramatic price swings, as well as country regulation. While regulation in crypto is viewed by many as a positive step forward, a country could just as easily ban its use (as China did in early 2021).
Never invest more than you’re willing to lose.
When it comes to investing, your timeline should dictate how risky of an asset you go for. I.e. if you need returns from an investment in a shorter time period, you should go for a safer asset, while a longer timeline equates to using a riskier asset. Investors recommend pairing highly volatile investments with a three-year timeline.
Establish your investment timeline and align it to a safer option (i.e. dividend stocks or Bitcoin), a slightly riskier opinion (i.e. growth stocks or development-based cryptocurrencies) or a high-risk option (like a new coin or an ICO that caught your eye).
This consideration can be broken down into two: how to allocate your portfolio and who will manage your portfolio.
Deciding to build your investment portfolio with both stocks and crypto can be a more risk-averse decision while establishing a solely crypto portfolio can have its advantages.
The second element is how and where to store your cryptocurrencies. As you might know, cryptocurrencies require a digital wallet to be stored, with plenty of options on the market. Here is a guide on how to find the one best suited to your needs.
"If You Invest Nothing, The Reward Is Worth Little"
As with anything in life, it’s always best to go in educated and aware. Every savvy investor will tell you the importance of weighing up the risks vs rewards and being educated on the factors driving the success of the asset. To stay up to date on crypto news, stay tuned to our Oobit blog.