In this article, you will learn the key differences between investing in stocks and crypto.
These days, word of crypto has inundated the airwaves, while news of companies rising and falling continues to pervade. This has led to a perceived "crypto craze" and widespread confusion about what crypto is, how its value is determined, whether it makes a sound and secure investment and whether that investment is better or worse than stocks.
The problem with not resolving this confusion is the simple difference between making and losing money. Without fully understanding the distinctive benefits and drawbacks of each type of investment, you could find yourself investing in the wrong asset at the wrong time and risk losing all your investment capital.
By the time you finish reading this article, you’ll understand what crypto is, and what makes it different from stocks. You’ll also learn what each of these asset classes are, the similarities and differences, the benefits and drawbacks of investing in them.
Before comparing and contrasting crypto and stocks, it helps to clarify what each one is.
Cryptocurrency, or crypto for short, is an alternative form of currency, or monetary system, to fiat currency like the U.S. dollar. More specifically, it is a digital asset maintained on a globally dispersed, decentralized computer network.
Crypto makes use of strong cryptography to provide security to all storage and transactions, hence its full name: "cryptocurrency". To gain access to their crypto account, or "wallet," a crypto holder must use a unique 16-character password.
Bitcoin is, perhaps, the most well-known and widely held cryptocurrency by far, with nearly two-thirds of crypto’s market capitalization in 2020, but thousands of others already also exist, such as:
According to Bloomberg, the value of all crypto investments in early 2022 is approximately $12 trillion
Crypto is built on blockchain technology, a digital ledger that records and tracks all crypto transactions. It is securely maintained across a peer-to-peer network of computers around the world.
In addition to being digital distributed and decentralized, Blockchain is transparent, which means all transactions are available for public view. It is also immutable, meaning entries made into the blockchain can never be changed.
Blockchain is said to be the backbone of cryptocurrency and the reason it is so secure.
Stocks are shares of ownership in a particular company. Each share of stock represents a fractional share of ownership in that company equal to the share of ownership conferred by every other individual share of that stock.
Only certain companies issue stocks, and they must follow strict regulations in order to do so. Each company only releases a certain amount of stocks, creating scarcity and, thereby, ensuring value as long as the company is sustained.
Crypto and stocks have several things in common, such as how they’re traded and their variable and changing value. Beyond these similarities, however, are some distinctive differences, including what each represents and how its value is determined.
Both crypto and stocks are assets you can trade on the open market through a brokerage.
The value of any stock or cryptocurrency changes over time based on a variety of market conditions, like current news or events or simple supply and demand.
You can buy and sell whole units (such as a full share or coin) or partial units (such as a fractional share or unit) based on whatever the stock or cryptocurrency is worth at the given moment.
You make money in crypto and stocks by buying them at a lower price than that at which you sell them. Some stocks and cryptocurrencies also pay you dividends recurrently for holding onto them once you own them rather than selling them.
Stocks and crypto are both considered secure. Blockchain makes crypto secure while brokerages and the SEC (Securities Exchange Commission) makes stocks secure.
They are also both considered transparent in the sense that the blockchain is open-source software, making its entries visible to anyone who wishes to view them, while stock-issuing companies must make public their financial data underlying those shares.
The largest and most significant difference between stocks and crypto is that a stock represents an ownership interest in a particular company while crypto represents the value the digital currency marketplace has given it at any point in time.
While stocks rise and fall in the short term based on investor sentiment and market conditions, they rise and fall in the long term based on the success or failure of the underlying company. Crypto, by contrast, changes value in both the short and long term due to investor sentiment and market conditions.
Deciding whether to invest in stocks or crypto requires evaluating the risks and rewards of each asset class, including the factors that can drive each one’s future success.
Stock investing has several advantages, including asset backing and voting rights.
There are, however, certain disadvantages to stock investing as well, including their volatility, lower potential for large gains and the fact that they’re tethered to an underlying business.
There’s a reason so many people, companies and governments are investing in cryptocurrencies, or many reasons, more accurately. But, there are also drawbacks investors must consider before making any crypto investment.
Key advantages of investing in crypto are its benefits as a hedge against inflation, the potential for outsized gains and an increasing number of crypto coins to choose from.
Investments in crypto also benefit from practical uses, increased adoption and the fact that they’re untethered to any underlying business.
Risks to be aware of when investing in crypto include its extreme volatility, unregulated nature, vulnerability to cyberthreats and the fact that crypto has no intrinsic value.
As you can see, there are valid advantages and disadvantages to investing in both stocks and crypto. Different factors affect the movement of each asset class, which means different classes may be more or less successful at any given point in time.
Moreover, there are additional considerations to make when investing in any asset class, stocks and crypto included.
These include your time horizon for investment, or how soon you will need to withdraw your invested funds and realize any profit or, contrarily, loss. They also include your personal comfort and risk tolerance and your investment goals and how you might best arrange your portfolio to meet them.
That’s why, ultimately, a smart investment portfolio contains a diversified mix of stocks and crypto, along with fixed assets like treasuries and bonds.