Crypto and Stocks: Understanding the Difference

The debate whether to invest in crypto or the stock market has been a topic amongst experienced traders for many years now. While they offer ways to earn money, both asset classes differ from each other in terms of structure (crypto is digital, stocks are in the real-world), volatility (cryptos can be hard to predict than stock markets), asset storage (cryptos are stored in digital wallets, while stocks are managed by brokers).

So, which is better? Crypto or stocks? Each asset offers a fair share of opportunities and risks. For newbies who want to start investing in crypto, here are facts you need to know to fully understand the crypto versus stocks debate.

What is cryptocurrency?

In simple terms, cryptocurrencies are digital currencies powered by blockchain technology. They rely on cryptographic techniques to secure and verify transactions and are typically used as a medium of exchange and a store of value. Most cryptocurrencies run on decentralized networks, and their market value is driven by supply and demand.

What is a stock?

Stocks represent partial ownership of equity in a business, and they reflect the value of a functioning company. Sometimes, the owner of a stock is also entitled to a share of the company’s profits in the form of a dividend. The value of a stock can move according to the company’s performance and other factors such as relevant news announcements.

How are crypto and stocks different from each other?

Both cryptocurrencies and stocks can be used by investors to build wealth. Yet, investing in stocks is different from investing in crypto.

Unlike stocks, investment in crypto doesn’t come with ownership of a share of a company. Crypto investors also don’t receive dividends in the traditional sense. Instead, one can lend or stake their crypto tokens for passive income.

There are also major differences in how crypto and stocks are traded. You can buy crypto at any digital currency exchange at any time of day and night, while stock exchanges operate with limited opening hours on weekdays.

Here’s a detailed look at the key characteristics of both asset classes:

Ownership

To buy and keep stock, a buyer usually has to open an account at a brokerage such as Charles Schwab, TD Waterhouse, or Fidelity. The brokerage makes trades and holds stock in the buyer’s name. Newer firms like Robinhood have streamlined the process, but their offerings aren’t as robust. A buyer also has to disclose personal information, such as their Social Security number and street address. Going through a brokerage provides a level of security.

One of the perceived benefits of crypto is its anonymity. No one needs to know who the crypto buyer is. A crypto owner holds assets in a virtual wallet or on a storage device, such as a USB drive. The downside of anonymity is that responsibility for security falls on the owner, who has to keep track of where the crypto is and remember a password of at least 16 characters. Owners have little recourse if hackers clean out their crypto wallets.

Exchanges

Stocks are traded on accredited exchanges throughout the world. They offer stock buyers security, stability, and transparency and are built to handle large trading volumes every day. Exchanges are strictly regulated (although specifics vary by country), providing protections to buyers and sellers.

Exchanges for buying and selling cryptocurrency are newer. Dozens, if not scores, of crypto exchanges exist. Two of the largest are Binance and Coinbase. Some exchanges work with third parties to smoothly exchange conventional currencies, such as the U.S. dollar, for crypto.

Volatility

Sudden and rapid changes in stock values are as old as stock exchanges. A piece of good news can launch a stock higher, just as bad news can send it lower. As the terms “Black Friday” and “Black Monday” attest, stock markets can plunge in a day. Usually, there’s an explanation, either economic or technical (such as a program-driven sell-off). Investors might see the value of their portfolios tumble, but total losses are rare.

One thing cryptocurrencies have been known for is their volatility. Ethereum, for example, started 2021 at about $730 and rose to $4,080 at the end of May. It dropped to about $1,786 in July, before rising to $4,082 in late October.

Regulation

After the stock market crash of 1929 unleashed the Great Depression, the U.S. created the Securities and Exchange Commission (SEC) to devise and enforce investor protections. Companies are required to disclose all information that can have an impact on their stock value. Investors and their financial advisors have a good deal of information on which to base their investment decisions.

By contrast, cryptocurrencies remain largely unregulated, which, for some crypto investors, is a mark in crypto’s favor. Crypto markets know no borders and are beholden to no governments. However, it leaves crypto buyers with no protection if something goes wrong with their investment.

Strategic complements

Cryptocurrency and stocks have some similarities as well as major differences. Investment professionals who recognize the strengths and weaknesses of each can use them in the same portfolio for different reasons.

Stocks provide stability. They’ve been the go-to investment to build wealth for individuals and organizations for most of the 20th century and into the 21st century.

Cryptocurrency is the riskier investment. It offers the chance for big rewards, but at higher risk.

But if both asset classes are used wisely together, they can help balance reward and risk in an investment portfolio.

Should you invest in crypto or stocks?

Any savvy investor needs to know exactly what they’re investing in. It’s crucial to weigh the risks and rewards of investing, and what will drive the investment’s success. If they don’t have this kind of information, they can’t make the calculation. In this case, it’s not really investing — it’s much more like gambling.

Bottomline is, make sure to do your research. If you’re looking for fractional ownership of a business, then start your trading journey in the stock market. But if you get excited with the high-risk-high-reward type of investment, crypto might suit you best.

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