Cryptocurrency has exploded in popularity in the last few years. In 2021, the global crypto market capitalization touched an all-time high of $3 trillion. These days, the crypto market cap sits at around $1 trillion.
Bitcoin alone is worth $400 billion and makes up 40% of the crypto market. Bitcoin is termed digital gold, and investors are continuously investing in Bitcoin in the hopes of making great profits.
The widespread acceptance of cryptocurrency and its rapidly increasing market capitalization has many people questioning the stock market and its returns. There are lots of key differences between the crypto market and the stock market.
One of the main differences is that stocks are shares in actual companies which are valued according to their cash flow and popularity. On the other hand, cryptocurrencies are not backed by anything in most cases and are valued according to the hype around them.
If you are a new investor deciding between stocks and the cryptocurrency market, you should carefully analyze your options before making any investment-related decisions.
For investors who are just starting, stocks might be a good long-term investment as they have a proven track record, and the chances of loss are very low when compared to cryptocurrencies.
Stocks vs Crypto: Differences
As an investor, you should always learn more about the assets you are investing in. That is because it is important to measure the risk versus reward ratio and understand how an investment can benefit you in the long run. If the asset you are investing in does not provide you with these statistics, it is not an investment, and you should run away from it.
There is a very fine line between investment and gambling, and investors should learn the difference between them before investing in any asset. Let’s take a look at some of the key factors investors must learn about stocks and cryptocurrencies before investing in them.
Stocks
By investing in stocks, you are buying shares of the listed companies. Investing in these talks of a company makes you an owner of a very small percentage share of that company. If you do not know how to analyze the market and past trends, you might easily get overwhelmed when trading stocks.
Stocks give the investors ownership over the assets and cash flow of a business. This way, your investment is perfectly safe and helps in the valuation of the business you have invested in.
Stock prices move every day according to the interest of investors in a company, which is primarily led by the future performance predictions of that business.
When a company increases its profits in the long run, its stock becomes more intriguing for investors, and its valuation automatically increases.
So, the stock of a company increases in value only if the underlying company achieves success in the long run.
Cryptocurrency
Unlike stocks, there are no hard assets to back cryptocurrency (except Stablecoins). This is true for even the biggest cryptocurrencies like Ethereum and Bitcoin. Cryptocurrencies are usually utilized as a transfer of value between two parties. Moreover, cryptocurrencies are used in smart contracts, which are automatically executed upon completion of certain tasks from the parties included in the contract.
Since cryptocurrencies are not backed by any solid asset, their price fluctuation happens purely because of speculation and sentiment. Cryptocurrencies are valued based on the hype they have created in the market and their trading volume per day.
Whenever the sentiment changes, the price of a cryptocurrency can increase or decrease drastically within a few seconds.
Whenever someone buys cryptocurrency, they buy it in the hopes that someone will buy it back for a higher price in the future. If you want to make your cryptocurrency investment successful, you will have to find someone willing to pay more than you did to buy the same amount of cryptocurrency.
Whenever the market is more optimistic than you, you will easily be able to sell your cryptocurrency for a higher price.
Pros and Cons of Crypto Investing
Pros
Hedge against Inflation
The decentralized nature of cryptocurrency is one of the most appealing features to many investors investing in it. Since cryptocurrency is not controlled by central banks or any third party, no one can make more cryptocurrency and cause inflation in the long run. This is what happens to fiat currencies like the Euro and Dollar.
Central banks like to print more money to improve circulation and cash flow in their country. This causes inflation as a side effect, and the value of inflated currency keeps decreasing in the long run.
On the other hand, cryptocurrencies like Bitcoin have a maximum cap on their market supply and are very difficult to mine, just like gold. This is the main reason why cryptocurrencies are termed digital gold by many investors. Many people are holding cryptocurrencies just because they can be used as a hedge against inflation.
Potential for Huge Profits
Whenever you invest in a cryptocurrency, There is a fair chance of you making huge profits in a short time. Lots of cryptocurrencies have recently skyrocketed in their price and have provided their investors with huge profits.
Since cryptocurrencies have made many people overnight millionaires, lots of investors are now investing in new cryptocurrencies in a bid to benefit from the huge profit potential of these digital assets. However, there is a huge risk attached to cryptocurrency investment, and investors should always do due diligence before investing in any crypto asset.
Rapidly Expanding Market
In the early days of cryptocurrency, there were only a few crypto coins available for trade in the market. However, due to the speculative nature of the cryptocurrency market, the numbers are changing rather quickly.
Due to the rapidly increasing popularity and investor interest in the crypto market, thousands of new coins have joined the game, and the market is rapidly expanding.
Interest in Digital Assets
Cryptocurrencies, in general, and digital assets, in particular, are exploding in popularity. That is because investors and governments around the globe are looking for the best digital projects and cryptocurrencies to invest in. Companies are even starting to accept payments in cryptocurrency.
As the acceptance of digital currencies continues to increase in the long run, the market position of fiat currencies will be challenged by these digital assets.
Cons
High Volatility
Since the cryptocurrency market is rather young and speculative, the volatility is high. This is primarily because there is nothing solid backing any cryptocurrency, and its value is derived from the market sentiment.
While many people have made fortunes by crypto investing, many have lost lots of money rather quickly by making the wrong investment decision. Moreover, there are no solid tools that can be used to predict the future performance of cryptocurrencies since there is no company or asset to back them.
Security Issues
Although there are lots of security and privacy-related benefits of cryptocurrencies, they have also been some of the biggest hacks involving cryptocurrencies. Moreover, due to the irreversible nature of cryptocurrency transactions, there is no way to recover the lost funds once you lose excess of your crypto wallet.
Absence of Intrinsic Value
There is no interesting value in cryptocurrencies. This means they are not backed by companies or solid assets, as in the case of stocks. Stocks have intrinsic value because they are backed by whole companies, and the future performance predictions of their companies drive their value in the market.
On the other hand, nothing like this is offered by cryptocurrencies, and their value is purely derived from speculation.
No Regulations
Although countries like El Salvador have not accepted Bitcoin as a legal tender, other countries are scared to accept cryptocurrencies because of the absence of regulation. Big countries like China and the United States are considering banning cryptocurrencies and crypto-related trading activity.
Pros and Cons of Stock Investing
Pros
Proven Track Record
In contrast to cryptocurrency, which is still a new investment tool, stocks have a proven track record of creating continuous profits for stock traders. Some stocks can even provide an average of over 10% annual returns in the long run.
Although some stocks can become a bit volatile for a short time, they are usually a stable form of investment for long-term investors.
Presence of Intrinsic Value
Since buying stocks of a company provides you with a percentage share of that company, the value of your stock depends on the performance of the underlying company over time.
Since companies have assets and cash flow, they can create profits for their investors. This is called intrinsic value, and every stock has some intrinsic value behind it.
Easy Accessibility
Since there are lots of stock brokers present in the market, the competition has gotten fierce, and some stock brokers have even decreased their prices to zero. As an investor, you have the luxury to choose between individual stocks or invest in a basket of different stocks through index funds.
Index funds can be used by both new and seasoned stock investors to diversify their portfolios and cut down their costs. Even small stock investors can choose to invest in index funds in the beginning when they do not have a lot of money to invest in stocks.
Strict Regulation
The stock market, brokers, and publicly listed companies are always strictly regulated by government agencies. The SEC requires companies to provide their stock investors with certain information.
Although there are still some irregularities in the stock market, it is largely regulated, and illegal activities are actively mitigated by the SEC.
Cons
Volatility
Since index funds include a balanced sheet of multiple stocks, the volatility factor is much lower as compared to cryptocurrencies. However, individual stocks can be very volatile but still less volatile than most cryptocurrencies.
Because of the volatility in the stock market, stocks are best held in the long run, as this helps stock investors to recover from short-term losses.
Low Gains
Since the risk factor is extremely low in the stock market compared to the crypto market, the gains are also lower. Especially stocks like S&P 500 include stable companies, and they have a very low chance of providing you with rapid gains.
On average, well-performing stocks can provide you with around a 10% average gain. On the other hand, some cryptocurrencies move by about 10% every single day.
Crypto vs. Stocks: Things To Consider
Time Horizon
The total amount of time required to receive a decent return from an investment vehicle is a very important metric. Investments with shorter time horizons are generally seen as safer investments. Your funds will be available for use whenever you need them.
As the volatility factor starts to increase, the time horizon of an asset also increases, and it becomes less valuable for short-term investors. According to experts, stock trading requires at least three years to phase out the volatility factor for any stock trader.
Although stocks are volatile as well, they are much less volatile as compared to cryptocurrencies. Moreover, investing in individual stocks invites more volatility, while index funds, including multiple stocks, have less volatility. That is because your portfolio is diversified by investing in an index fund, and portfolio diversification decreases the volatility factor.
Stocks are a good choice for investors who can live without their investment money for a few years. If you can leave your invested money alone for a long time, stock trading is the perfect option for you.
The volatility factor varies depending on the type of stock you are investing in. For example, growth stocks tend to have high volatility when compared to dividend stocks and value stocks.
If an investor wants to access their money, they will shift their stocks from growth stocks to dividend stocks. Most investors do this when they are about to retire and need to tap their investment money.
Stocks are volatile as well, but the volatility of cryptocurrencies is unmatched by any other asset. Depending on the market sentiment, cryptocurrencies can suddenly gain or lose their value by a huge percentage. This is why cryptocurrency is not a suitable form of investment for short-term investors.
However, if you can live without the invested money for years to come, you can invest in the right cryptocurrency and leave it alone to recover its price, and then provide you with high returns in the long run.
Portfolio Management
If you are looking to build a solid investment portfolio, you do not have to choose only one between cryptocurrencies and stocks. Rather, you can weigh your choices, analyze the market, and make smart investment decisions. You can also choose to balance your portfolio with a mix of crypto and stock investments.
Since the stock market has been there for a long time, it is relatively stable, and the majority of your investment portfolio should be made with stock investments. Investors looking to invest their money for more than a decade (pension funds) can consider stocks as the perfect way to invest money.
If you are interested in investing in a single stock, you should do a lot of research and analyze the market of that stock before investing in it. Proper analysis will help you minimize your risk and maximize your profit in the long run.
If you are choosing index funds, you should choose from diversified funds like S&P 500. To invest in index funds like these, you do not even need much research and analysis. These index funds will diversify your portfolio, minimize the risks, and maximize your long-term profit.
Due to its high volatility, cryptocurrency investments should only make a small percentage of your whole investment portfolio. A safe range is anywhere between 3 to 5%.
Since cryptocurrency is speculation based, you might make a lot of money even by keeping it limited to 5% of your portfolio. Moreover, if the cryptocurrency and see you invested and goes to zero, you want to lose a significant sum of your money.
Over time, if cryptocurrency becomes a significant part of your investment portfolio because of high returns, you can reallocate the money towards the stock market to maintain the balance. This will help mitigate the risk of your investment portfolio.
Conclusion
Although lots of cryptocurrencies have provided their investors with huge gains in a relatively short time, new investors should still focus on the risk factor and understand the crypto market totally before making any investment decisions. Whenever you have to invest in cryptocurrency, you should assess your risk appetite and whether you can afford to lose all of the invested money.
Some legendary investors like Warren Buffett have never touched cryptocurrencies but have still managed to grow their portfolios by only investing in stocks. So, if the stock trading is done right, there is no need for investors to go toward the crypto market.