Investing In Crypto vs Stocks: What Are the Key Differences?

investing in crypto vs stocks

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.

Defining Crypto and Stocks

Before comparing and contrasting crypto and stocks, it helps to clarify what each one is.

What is Cryptocurrency?

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:

  • Ethereum
  • Tether
  • XRP
  • Stellar
  • USD Coin


According to Bloomberg, the value of all crypto investments in early 2022 is approximately $12 trillion

Blockchain Tech

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.

What Are Stocks?

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.

 

What are the Similarities and Differences

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.

 

Similarities Between Crypto and Stocks

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.

Differences Between Stocks and Cryptocurrencies


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.

Pros and cons of Stock Investing

Stock investing has several advantages, including asset backing and voting rights.

 

Pros of Stock Investing

  • Asset Backing - Stocks are backed by the given business’s assets and cash flow, while crypto generally isn’t backed by any specific store of value. (The exception to this is stablecoins, which are a type of cryptocurrency backed by fiat currency or some other store of value.)
  • Voting Rights - Owning shares of stock also gives you voting rights in major company decisions, whereas owning crypto gives you no such rights.

Cons of Stock Investing

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.

  • Volatility - A basket of diversified stocks, such as in an index fund or mutual fund, is not terribly volatile, but the individual stocks within those funds are quite volatile.
  • Less Potential for Big Gains - Beyond high-risk "penny stocks," most stocks, and certainly those widely held and tracked in the big indices like the Dow and S&P 500, move up and down relatively slowly over time. Stocks have only appreciated approximately 10 percent per year over the long time, while crypto can move 10 percent or more in one day.
  • Tethered to Underlying Business - When you own stocks, you’re greatly dependent on the success or failure of the underlying company to determine the success or failure of your investment. If the company grows, your investment will most likely rise, but, if the company fails, you could lose your entire investment.

Pros and Cons of Investing in Crypto

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.

 

Pros of Crypto Investing

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.

  • Inflation Hedge - Investing in crypto can serve as a hedge against the fluctuations of fiat currency. As a decentralized asset, meaning there’s no controlling government or central bank that may simply produce more and cause inflation whenever it sees fit. The scarcity of supply of each cryptocurrency is partly designed in order to prevent inflation, as, unlike dollars and other fiat currency, no new coins can be produced in an attempt to sway market conditions or stabilize the economy. For example, there were only 21 million Bitcoins ever minted, and no more ever will exist. Crypto’s protection from inflation has led it to garner the nickname of "digital gold."

  • Outsized Gains - Crypto also presents the possibility of earning outsized gains on your investment. This is evident in the often skyrocketing price appreciation in several cryptocurrencies in recent times.

  • Increasing Number of Crypto Coins - The growing interest in cryptocurrencies has also led to an increase in the number of crypto coins being released. This creates greater competition in the crypto market and allows for greater diversification of crypto holdings in an investment portfolio.

  • Practical Uses - In addition to serving as an investment, cryptocurrency can also be used as an alternative to standard fiat currency. That means, unlike stocks, you can use crypto to send money to another individual or company, such as to make payments on a bill, or to create "smart contracts" that execute automatically only once certain stipulations are met.

  • Increased Adoption - Crypto is also currently benefiting from a prevailing increase in interest and adoption across investors, businesses and governments. This bodes well for its continued and consistent rise in value over time as it becomes increasingly integrated into global exchange as an accepted form of currency. Major FinTech (financial technology) platforms like Square and PayPal now facilitate transactions in crypto. Bitcoin became legal tender in El Salvador, the first country to do so, in 2021, and only more are expected to follow.

  • Untethered to Corporate Success - When you own crypto, you’re not tethered to the success or failure of any underlying company. The success or failure of your crypto investment is, therefore, contingent almost exclusively on the market conditions and investor sentiment at the time.

Cons of Crypto Investing


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.

  • Extreme Volatility - While stocks may be volatile, cryptocurrencies are extremely volatile. In 2021, a single Bitcoin fluctuated in value between $28,383 and over $65,000. As a relatively new and unestablished asset class not backed by any particular store of value, cryptocurrencies can fluctuate drastically in value in virtually no time at all.

  • Unregulated Nature - Stocks, the companies that issue them and the brokerages that facilitate transactions between buyers and sellers of stock are subject to strict government regulations that ultimately protect the investor. Cryptocurrencies are as yet unregulated, other than bans on use in certain locales, and therefore do not offer investors the same protections.

  • Cybersecurity Risks - As a digital asset, cryptocurrencies are vulnerable to cyberthreats and could be subject to cyberattacks, including the risk of theft. While stock brokerages may have their systems hacked, the stocks themselves held in those brokerages remain under their shareholders' ownership. As such, it can be much harder to retrieve stolen crypto than stock.

  • No Intrinsic Value - Another downside of the fact that cryptocurrencies aren’t backed by a trusted and reliable store of value is that they have no intrinsic value. While the value of a stock is contingent on factors like a company’s earnings, the value of cryptocurrency is based purely on factors of the crypto market.

Investing In Crypto vs Stocks: Which Is Better?


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.

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