Crypto vs. stocks – what’s the best investment? The traditional stalwart of the investment world — stocks — now compete with the emerging, dynamic, and often volatile world of cryptocurrencies. Whether you are a veteran or new to the investment world, this comprehensive guide on crypto vs. stocks will provide the insights to navigate these two compelling yet contrasting landscapes.
KEY TAKEAWAYS
► Stocks and cryptocurrencies offer investment opportunities but differ in regulation, underlying technology, volatility, and utility.
► Cryptocurrencies are powered by blockchain technology and trade 24/7, while stocks operate under strict regulatory oversight.
► Crypto stocks allow indirect exposure to the crypto market and participation in the industry while mitigating some risks.
► Investing in both crypto and stocks can diversify a portfolio, but each market requires thorough research due to specific risks and costs.
Crypto vs. stocks: Differences and similarities
Stocks and cryptocurrencies offer investment opportunities but differ fundamentally in various ways. At times, crypto and stocks have correlated in terms of performance — especially tech stocks — particularly in 2022 during the bull market cycle. Low interest rates fueled this growth via loose spending and risk-on investing.
However, cryptocurrency has de-correlated from stocks, at times being preferred as a hedge against stocks. If you look at the NASDAQ and S&P500, traditionally used as indexes to gauge the total stock market, and Bitcoin, which makes up half of the total cryptocurrency market cap, you will notice a few instances where the crypto and stocks have veered off.
The above chart shows Bitcoin outperforming both the S&P and NASDAQ over a five year period.
Beyond its use as an investment vehicle, there are other similarities. For example, investing in the stock and cryptocurrency markets is largely narrative-driven. In other words, many people trade them based on how the media and individuals perceive them.
The biggest differences between crypto and stocks are the underlying technology, regulation, risks, and utility. Here is a more detailed breakdown of the differences.
Underlying technology
Stocks represent equity or ownership in a company tied to its assets and earnings. It is rooted in the traditional financial system and tangible business activities.
Cryptocurrencies, on the other hand, are digital or virtual currencies secured with cryptography. They function on blockchain technology – a decentralized ledger system. They can serve various purposes, such as a medium of exchange, a store of value, or a utility token.
Regulation
The stock market is highly regulated and operates through well-structured and established exchanges like NYSE or LSE, with robust rules and disclosure requirements for companies to protect investors.
In contrast, cryptocurrency markets are less regulated and more decentralized, and the regulatory framework varies greatly worldwide. This can offer increased privacy and freedom but also poses risks like fraud or manipulation.
Risk factors
Cryptocurrencies are far more volatile than stocks. Prices are often influenced by speculative trading and market sentiment rather than the underlying financial performance of a business. Stocks are generally less volatile and tied to corporate earnings.
While they can fluctuate with business cycles, they do not exhibit the same level of price swings as cryptocurrencies. However, stocks can also be influenced by market downturns, poor management, or industry trends.
Utility
Stocks have set exchange hours and can offer dividends and voting rights to shareholders, serving primarily as an investment or ownership stake.
Cryptocurrencies, conversely, trade 24/7, do not offer dividends, and while some tokens may offer voting rights, they can be used for investment, transactions, or smart contracts.
In summary, while both stocks and cryptocurrencies offer the potential for returns, they represent different asset classes with unique risks, benefits, and uses. Whether to invest in stocks or cryptocurrencies depends on an individual’s risk tolerance, investment objectives, and understanding of each market.
Crypto vs. stocks compared
| Crypto | Both | Stocks |
|---|---|---|
| Decentralized | Investment vehicles | Centralized |
| 24/7 trading | Used as a hedge against inflation | Limited to trading hours |
| Can be used for transactions | Volatile | Represents ownership in a company |
| Mostly unregulated | Investing largely narrative-driven | Highly regulated |
What is a crypto stock?
These stocks offer investors indirect exposure to the cryptocurrency market without the need to invest directly in a specific digital asset. Thus, they are more like investing in traditional stocks than in crypto itself.
Investing in crypto stocks allows investors to participate in the potential upside of the cryptocurrency industry. Yet, it mitigates some of the risks associated with the high volatility of individual cryptocurrencies.
Crypto companies involved in this sector can range from crypto mining operations and crypto exchanges to tech firms developing blockchain-based applications or financial institutions integrating crypto into their offerings.
In essence, buying a crypto stock is an investment in a company with stakes in the crypto space. The company’s financial performance may correlate with the general trend and acceptance of cryptocurrencies and blockchain technology in the economy.
However, it’s crucial to conduct thorough research and consider the company’s financial health, growth prospects, and potential risks before investing.
How do you choose crypto stocks?
Investing in crypto stocks is a process that involves careful consideration, just like any other investment. Here are some steps to guide you through this process:
- Understand the risk: Crypto stocks are tied to the highly volatile decentralized asset market, so their prices could fluctuate significantly. Make sure you’re comfortable with this level of risk.
- Choose your investment: Based on your risk tolerance and investment goals, decide on the type of crypto stock you want to invest in. Established players like PayPal or Nvidia have entered the crypto space and might appeal to cautious investors. For those willing to take more risk, newer, more dedicated crypto companies like Coinbase or Hut 8 Mining Corp may be more suitable.
- Do your homework: Before investing, research the companies you’re interested in. Look at their financial health, their role in the crypto space, and their potential for growth. This information can be found through your broker, company websites, and news reports.
- Open a brokerage account: To buy crypto stocks, you need to have a brokerage account. This can be done using established platforms such as eToro and AvaTrade. After signing up, you’ll have to fund your account.
- Purchase your crypto stock: Once your brokerage account is ready and funded, search for the crypto stock you want to buy. Click on the “buy” or “trade” button, enter how many shares (or what dollar amount of fractional shares) you want to purchase, and submit your order.
Remember, only invest what you can afford to lose. While crypto stocks can be a good long-term investment, they are subject to the cryptocurrency market’s ups and downs, which can be quite volatile. As always, diversifying your investment portfolio is a good strategy to mitigate risk.
Where to trade crypto and stocks
Individuals need to consider various factors when investing in cryptocurrency and stocks, such as security, transparency, and regulatory protection.
If you want to invest in stocks, you will need a brokerage account. Using such brokerages comes with a level of security, as they are regulated by financial authorities like the Securities and Exchange Commission (SEC) in the U.S. and must adhere to strict rules to protect investors. These platforms can facilitate the purchase and sale of stocks on your behalf.
When it comes to investing in cryptocurrency, the process is a bit different. Instead of brokerages, you typically use cryptocurrency exchanges. These are digital platforms where you can buy, sell, or exchange cryptocurrencies for other digital currencies or traditional currencies like U.S. dollars or Euros.
However, cryptocurrency exchanges are less regulated than traditional stock exchanges and thus come with their own set of risks, including potentially being more susceptible to hacking.
If you wish to invest in both or simply trade multiple types of assets, including crypto and stocks, a multiasset platform such as eToro or AvaTrade might be what you’re looking for.
While these are different assets, investors should exercise the same level of research before even signing up on any of these trading platforms.
“The difference in trading between cryptos and stocks might be driven by the lack of periodic cashflow information about cryptocurrencies.”
MIT research paper
Note that crypto trading on platforms such as eToro and AvaTrade doesn’t imply direct ownership of digital assets.
Should you trade crypto or stocks?
Deciding whether to trade crypto or stocks isn’t necessarily an either-or choice; you can consider investing in both. However, it’s important to stay aware of evolving regulations as the crypto market adapts to changes in the global economy. In terms of cost, stocks are typically less expensive to trade and manage compared to cryptocurrencies. On the other hand, crypto exchanges may charge fees for buying, selling, or converting cryptocurrencies. Overall, crypto and stocks can serve different purposes in your investment portfolio.
Remember, it’s crucial to do your own research (DYOR) before making any investment decisions to ensure you’re fully aware of the risks associated with each.
Disclaimer: This article is for informational purposes only and should not be considered investment advice. Trading crypto or stocks carries risk. The crypto market is particularly volatile and you can lose money.
Frequently asked questions
What is a crypto stock?
What are good crypto stocks to buy?
Is crypto stock a good investment?
How do the rules and regulations for cryptocurrencies in 2024 compare to those for stocks?
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