These are desperate times and we live in a world of uncertainty. The way things are going, investors are looking for alternative investment routes like Bitcoin, as the stock market tumbles further. When talking about cryptocurrencies, they come close enough to be useful but as they say, investments are always risky and cryptocurrency is one of the riskier investment choices out there.
Without any doubt, we can say that Bitcoins are among the hottest commodities out there. Moreover, currently, more than 4,000 cryptocurrencies are there in the world. Cryptos gained a lot of hype back in 2017 when the value of Bitcoin increased by 1,318 percent.
These profits were nothing short of miraculous, far above anything a stock investor could hope to achieve in a lifetime. But this raises the question of what cryptocurrency is and how it works. Is it risky to invest in cryptos instead of stocks? People investing their money in a profitable source to develop wealth is nothing new. Although all types of investment portals include some risks, some are less volatile than others and can withstand major economic downturns.
As a result, bitcoin and the stock market have emerged as the most popular investment options in the twenty-first century. This has sparked a heated debate about the merits of cryptocurrencies vs stocks. Stocks are a representation of a company’s ownership. They represent a company’s worth and fluctuate in price according to the company’s performance in the market.
Cryptocurrency, on the other hand, is a digital asset that debuted in 2009 with the well-known bitcoin. It can be digitally saved and traded. A cryptocurrency’s value is determined by market demand, supply, and adoption. People were constrained to stock market investment models for many years.
However, the recent rise of cryptocurrencies and the price of bitcoin has enticed or, more importantly, redirected many investors to try their hand at the digital currency market. Unfortunately, this does not obscure the fact that the bitcoin market is extremely volatile and fraught with dangers. While bitcoin made headlines in May when it hit a new high of US$60,000, it was on the verge of dying within a month.
It’s no different in the stock market. The S& P 500 has lost more than a third of its value in the early days of the pandemic. As a result, the confusion between cryptocurrencies and stocks remains unresolved for investors looking for the best investment model. To make things easier for investors, Analytics Insight has attempted to decipher some of the hidden parallels and differences between cryptocurrencies and equities.
What Is Cryptocurrency and How Does It Work?
A cryptocurrency is a digital asset or a digital currency that functions similarly to traditional currencies in that it can be used to buy goods and services, but it is based on a decentralized recordkeeping system called blockchain and is protected by encryption. The blockchain — the infrastructure that cryptocurrencies are built on – is the core backbone of cryptocurrencies like Bitcoin. The most appealing aspect of bitcoin is that it is a hybrid of an asset and a currency.
Crypto data isn’t stored in a single hub, unlike traditional methods of calculating value; in fact, there is no central authority in control of transactions, and power is distributed among the members of any specific crypto community. Cryptography is used extensively in cryptocurrency to provide a secure technique for encoding the rules of a cryptocurrency system in the system itself, making it extremely difficult to counterfeit and preventing tampering.
What are the most common cryptocurrency types?
You’ll need to select where you’re going to invest your money before you get into crypto. There are thousands of cryptocurrencies available, and the number is growing every day—but some are more well-known than others. Among them are:
- Ether (Etherium)
What exactly are stocks?
A stock, sometimes known as equity, is a type of investment that represents shares of ownership in a company, with each share of stock representing a fraction of the firm’s ownership. If a firm has 100 shares, each share represents one percent of the company’s ownership. As a result, if you own at least 51 shares, you effectively own the corporation.
Companies typically sell their stock to raise funds for expansion. This implies that they are only selling a portion of their business. Stocks can be purchased and sold privately as well as on stock markets.
There are various stock exchanges around the world, including the NASDAQ and the New York Stock Exchange, which are two of the world’s largest stock exchanges. Stocks, like other investments, come with dangers, but they also have the potential to make money.
What’s the Difference Between Cryptocurrency and Stocks?
The first stock exchange, the Amsterdam Stock Exchange, was established in 1611, and stocks and stock exchanges have a long and illustrious history. In 1698 and 1792, the establishment of the London Stock Exchange and the New York Stock Exchange, respectively, shaped the modern financial world. Stock exchanges have become an important part of our financial system since then.
The London Stock Exchange alone handles about a million transactions each day, while the New York Stock Exchange handles 2.4 billion shares every day. Stocks have historically provided investors with rather stable returns, even though investments might vary up and down. From 2011 to 2020, the average yearly stock market return for the S& P 500 Index was 13.9 percent.
Crypto, unlike equities, is a relative newcomer, having only been around since 2009. Since Satoshi Nakamoto’s white paper on Bitcoin was published in 2008, cryptocurrencies have exploded in terms of popular awareness and interest. Bitcoin saw between 300,000 and 400,000 transactions per day in 2020/2021, with Ethereum (Ether) surpassing a million transactions per day in July 2021.
Volatility in prices
The term volatility describes how much the price of an asset swings over time. Highly volatile assets might have large price swings (both up and down), whereas less volatile assets are more likely to be stable. So, what’s the difference in volatility between bitcoin and stocks?
In general, cryptocurrencies are considered more volatile than equities due to the uncertainty surrounding their future value and the fact that they are frequently not backed by tangible assets. And, because the crypto market comprises several crypto whales or persons or corporations who own a huge amount of a single coin, they become more subject to the activities of investors. Keep in mind, however, that even fewer volatile investments, such as stocks, can encounter unexpected bouts of volatility.
Government regulation governs the majority of stock markets around the world. Administrative authorities with broad powers to investigate and punish wrongdoing, such as the Securities and Exchange Commission (SEC) in the United States, has broad authority to investigate and punish any wrongdoing. These safeguard both investors and the market as a whole, requiring “those seeking your investment funds to tell you the truth about their enterprises” and “people selling securities to treat you fairly and honestly, putting your interests first,” as the SEC puts it.
They’re also not afraid to punish wrongdoers, with JP Morgan Chase receiving one of the SEC’s largest fines to date of US$13 billion for its role in the current financial crisis. The crypto market, unlike the stock market, can be a bit of a wild west: it’s a system that prides itself on being decentralized and unregulated, so it’s not subject to the same kinds of governmental monitoring.
Governments are currently attempting to integrate cryptocurrencies into their existing financial systems. The Chinese government, for example, recently outlawed all cryptocurrency trading and speculation, and the International Monetary Fund (IMF) is asking for comprehensive, far-reaching crypto regulation to protect investors from market volatility.
Scams and dangers to one’s security
Cryptocurrency marketplaces are rapidly expanding and growing, which, combined with their mostly unregulated character, makes them a hotbed for all kinds of scams. Attempts to get people’s data, such as the codes required to access a person’s crypto holdings, or attempts to make investors transfer crypto to scam artists who may be impersonating legal businesses, are common themes in these frauds. In 2021, there were more than 80,000 reports of cryptocurrency-related crime in the United States alone.
Scams and security hazards abound in the stock market as well. The pump and dump scheme, in which a stock’s price is artificially boosted by overly exaggerated remarks encouraging investors to buy before the scheme’s orchestrators sell their holdings at a much higher price, is one of the most well-known stock scams. There is a slew of other stock scams as well. Do you recall Bernie Madoff? In the early 2000s, his ponzi scam defrauded investors out of an estimated $50 billion.
If you prefer stocks to bitcoin, you can invest in companies from virtually every industry and region on the planet. You can invest in everything from Japanese automobiles to US-based computer companies, and everything in between. This enables you to build a portfolio that isn’t completely reliant on specific industries or geographical regions. As a result, you may be less likely to lose everything.
While there are many different types of cryptocurrencies (over 16,000 as of January 2022, according to coinmarketcap.com) and numerous forms of crypto assets, such as NFTs, to choose from, there are fewer diversification choices with crypto than there are with stocks. While making sure you don’t buy just one sort of crypto coin will help lessen the risk, there’s no easy method to truly diversify your investments. If you invest all of your money in one sort of coin or a small number of them, you put yourself in a risky position.
A cryptocurrency is digital money designed to be used as a medium of exchange for purchasing goods and services, with transactions secured by encryption. Cryptocurrencies, unlike flat currencies, cannot be generated out of thin air. It cannot be a true currency, despite its intrinsic value. Stocks, on the other hand, are a type of investment that represents shares of a corporation’s ownership, with each share of a stock representing a fraction of the company’s ownership.
Cryptocurrencies tackle the problem of absolute power by sharing it among a group of people, or, better yet, among members of a community over a network. Blockchain technology is based on the principle of decentralization. Stocks can be purchased and sold privately as well as on stock markets. Companies that want to develop their business sell stocks to raise funds. Investors and companies have a lot of clout because of where they place their money.
Unlike regular cash, where banks or a digital payment service take a cut, the primary notion of cryptocurrencies is that there is no middleman to manage your transactions or charge any commission. There are no middlemen with cryptocurrencies; instead, network participants in the blockchain operate as the men in charge of transactions, and their income is calculated differently and is modest. A broker operates as a middleman between buyers and sellers in the stock market.
Cryptocurrencies such as Bitcoin are not managed centrally by any regulatory organization or government; transactions on the blockchain ledger system are authenticated and recorded without the involvement of any third parties. The governance is dispersed among the members of the community who have transaction access. The stock market, on the other hand, is heavily regulated and overseen by federal organizations such as the Securities and Exchange Commission of the United States (SEC). To ensure fair trade practices, the SEC monitors the whole stock market.
The Convergence of Cryptocurrency and Stock Investing
Since its inception, the cryptocurrency market has followed a digital paradigm of operation. The stock market, on the other hand, is an entirely different scenario. Financial advisors or brokers used to accept money from investors and invest it in the stock market.
Fortunately, the situation has altered, and the stock market has undergone a dramatic shift as well. Both cryptocurrencies and equities can now be bought and sold via a digital exchange, brokerage account, smartphone app, or other online venues. In terms of look, trading choices, and order-book-based liquidity, they also provide a similar user experience.
Retail trading options provide for general trading orders such as a market order, limit order, and stop (or stop-loss) order. Even while the buying and selling of cryptocurrencies and equities may appear to be comparable, there are fundamental distinctions that must be addressed.
Last but not least,
Exchanges are available in a range of sizes and shapes. Some are classic stock exchanges with intermediaries that use various methods to defraud you of your money. Some brokers may trade against your orders, resulting in excessive commissions.
Cryptos, on the other hand, are a different story; they’re a prospective investment vehicle, but they don’t have any governance, which means there’s no central authority, no middlemen, and no risk. That, however, is not the case. Because the crypto market is still in its early stages, investing in cryptos comes with its own set of hazards. As a result, getting to know the crypto community could be the next step in navigating this relatively new sector.
Should I put my money into crypto or stocks?
So, is cryptocurrency a better investment than stocks? Certainly not. You may want to explore investing in both, depending on your risk tolerance.
Adding cryptocurrency to your stock portfolio can provide useful diversity while also opening the door to potentially lucrative returns—all without exposing yourself to the hazards of either investment. Before you invest any money, think about the following:
What is the most you can afford to lose financially?
A well-diversified stock portfolio, rather than crypto investments, can provide a more stable environment for your money.
How much do you expect to earn?
Stocks can provide more consistent returns, but crypto has the potential to provide bigger increases.
What’s your schedule like?
Cryptocurrency price swings can let you gain money far faster than the stock market, but they can also result in large short-term losses.