A comparison between investing in cryptocurrencies and stocks may sound absurd, especially for those who have been investing for a long time. They have multitudes of differences, starting with how they function.
But with the growth we have seen till now, it is fair to say that many are considering cryptocurrency investments, regardless of their massive volatility.
But how do you choose between investing in cryptocurrencies and stocks? The best course of action is to understand both and analyze the differences between stocks & cryptocurrencies and compare them with your goals and risk appetite. Let us examine the same.
What is a stock?
A stock is a security that reflects partial ownership of the issuing company.
Shares of stock entitle the owner to a proportional share of the corporation’s assets and earnings proportional to the amount of stock owned. Investors trade stocks in stock markets.
The consensus behind investing is to sell stocks you own at a higher price to pocket the profit.
What is cryptocurrency?
Cryptocurrency, often known as crypto, is any digital or virtual money that employs encryption to safeguard transactions.
Instead of a central issuing or regulating body, a decentralized system records transactions and issues new units for cryptocurrencies. Cryptocurrency investing refers to buying cryptos to sell them later at a higher price for profit.
But cryptocurrency prices are much more volatile as compared to stocks.
Crypto vs. Stock market – The differences
Below are the nine main differences between cryptocurrency and stock market investments.
1. Buying and storing
Stock markets worldwide have similar ownership norms for investing and storing. A demat and a trading account are necessities. A demat account allows you to store your stocks in a dematerialized form (compared to how they were stored as physical receipts in the past), and a trading account helps you with an interface to access the stock exchange.
Both of these services are usually provided by brokers since direct access is not given to individual investors. You will need documents such as a PAN card, an identity, and address proof to access these services.
On the other hand, you often have direct access to the cryptocurrency exchange. Furthermore, there are more than one methods to own them, including mining.
Cryptocurrency can be stored in different ways as well. In most cases, they are stored in online crypto wallets. But they can even be stored in USB sticks, increasing flexibility. At the same time, this increases the risk of storage.
Volatility is the degree to which the price of an asset changes over time. Highly volatile assets might undergo huge price fluctuations (both upward and downward), while less volatile assets are likely to demonstrate greater consistency.
Both stocks and cryptocurrencies are volatile assets, but cryptos tend to be much more volatile than stocks. This means there is a higher chance for you to gain but an equally higher chance for you to face losses.
The state regulates the majority of stock exchanges across the globe. However, cryptocurrencies exist outside of any central authority. As a result, it is not as closely monitored as stock markets.
Governments worldwide are now struggling to figure out how to integrate cryptocurrency markets into their established monetary frameworks. Still, different schools of thought exist regarding whether the same is needed and, if yes, how successful it can be.
4. Security risk
Cryptocurrencies are growing and changing rapidly. Because of this and the fact that they are primarily unregulated, scammers are finding fertile ground there. Scammers target unsuspecting investors by pretending to be reputable businesses or organizations to trick them into sending their cryptocurrency.
Scams and security threats are also present in the stock market. Since the stock market is highly regulated, the number of scams and attempts to scam is much lesser.
While stocks are often considered quite liquid, different cryptocurrencies’ liquidity varies widely. There could be situations where you cannot sell a cryptocurrency for anywhere near the desired value due to a price crash. Such situations are possible with stocks, too, but in most cases, the magnitude is much less.
Slippage is another issue both face. It occurs when one investor sells a substantial quantity of an asset during times of low liquidity, which has a detrimental effect on the asset’s market.
6. Trading costs
Both stock and cryptocurrency trading come with their costs. In the case of stock markets, the primary cost is brokerage charges. But they are highly regulated and strictly follow the guidelines.
On the other hand, charges associated with cryptocurrency trading are often decided by the exchange or wallet. They could charge you for loading money to the wallet, for trading, and in some cases, for withdrawing money from the wallet as well.
7. Trading hours
The stock markets are typically only accessible, Monday through Friday during regular business hours and are closed on weekends and national holidays.
The cryptocurrency market, in contrast, is open every day of the year, 24×7.
Stocks are a way for companies to raise capital, and investors buy them to sell afterward for profit. On the other hand, a cryptocurrency is a form of digital money first and an investment option second.
When you invest in a company, you effectively invest in a piece of the business itself. However, when buying a cryptocurrency, you are not necessarily acquiring a piece of the blockchain but merely a means of exchange.
You have different stocks to choose from according to your goals and risk appetite. For instance, you may choose a large-cap company stock if you want to invest in a less risky option. But when it comes to cryptocurrency, even though there are multiple options, they all suit investors who can stomach a significant amount of risk. The volatility also makes planning your investment much harder.
Similarities between crypto and stocks
Even though there are a large number of differences, certain factors are similar to crypto and stocks. Below are the three most significant similarities.
- Both cryptocurrency and stock markets are perpetual auction markets.
- Most cryptocurrency markets mimic the stock market using centralized limit order books and matching-order algorithms.
- The volatile pricing behavior of cryptocurrencies is strikingly comparable to that of penny stocks.
Should you invest in crypto or stocks?
The decision to invest in any or both should be made based on your comfort level with risk. Incorporating cryptocurrency into a stock portfolio may provide a welcome dose of diversity while also opening up the possibility of significant returns.
Is crypto better than stocks?
Your investment choice should ultimately depend on your investment taste. Understanding both options thoroughly can help you with your choice. But generally, cryptocurrencies don’t often suit investors who are conservative about risk.
The differences between investing in cryptocurrencies and stocks are very stark. Due to this, there is a significant amount of unfamiliarity as well. Doing thorough research can help you understand each investment option better and choose what suits you better.
And when you talk about cryptos, how can you forget about tax, right? Thank God we have KoinX that can simplify your crypto taxes for you right away.