In today’s world, people tend to invest their surplus money to gain some profits. The two popular ways of investing in today’s financial markets are stocks, shares, or cryptocurrencies. These financial assets have their unique markets, trends, and behavior, but they also share some similarities. In this article, we will explore these two investment options to gain a better understanding of each one.

What are cryptocurrencies?

Cryptocurrencies are digital assets that are part of blockchains, which are ledgers containing large amounts of data that record all transactions made using the blockchain. Various types of cryptocurrencies serve different purposes on the blockchain. Some cryptocurrencies are used for transaction fees, while others are utility tokens used for services provided by the networks that own these tokens. There are also governance tokens that function like stocks and give partial ownership of the project associated with them.

It’s important to note that cryptocurrencies are not backed by any hard assets, except for stablecoins that USD backs. This means that these tokens are speculative assets whose prices depend solely on market demand and people’s perception of them. As a result, it’s not uncommon for crypto prices to rise or fall without any significant reason, making it challenging to trade them.

What are Stocks?

Stocks are a way for you to own a part of a company. When you buy stocks in a company, you are buying a portion of that company. The amount of stock you purchase will determine how much of the company you own. Similar to cryptocurrencies, there are different types of stocks available, but not as many variants. Some stocks may give dividends, which is a share of the profits made by the company, while others may not provide any benefits, and you simply keep your shares, hoping that the value of the company will increase.

Unlike cryptocurrencies, stocks have companies behind them that provide them with a definite value. When a company is doing well, receives substantial investments, and generates good profits, the stock price tends to increase. Conversely, when a company is performing poorly, losing a lot of money, and investors are leaving, the price of the stock drops. This makes it easier for investors to analyze the market since they have something concrete to evaluate.

Main differences between Crypto and Stock

Cryptocurrencies and stocks are both financial assets that can be traded and share some similarities. However, there are significant differences between them. Understanding these differences is important for anyone interested in investing in them, as each requires a distinct approach and investing style. Let’s examine some of the most vital differences between these two assets.

Price Volatility

One key difference between stocks and cryptocurrencies is their volatility. Volatility refers to the degree of price fluctuations within a short period, whether the price goes up or down. It is important to consider this volatility while investing because different investment strategies are required for assets with higher or lower volatility.

Cryptocurrencies are significantly more volatile than stocks in terms of price movements. The main reason behind this volatility is that cryptocurrencies are speculative assets. Since most cryptocurrencies lack backing from any tangible assets, their value is determined by the perception of investors, leading to divergent views among investors and causing price fluctuations of up to 10% in a single day or even more in some cases. Stocks, however, are linked to the companies they represent, which provides a basis for assessing their value. This creates a more stable market and a 10% price change in one day is uncommon among top stocks.

History

Stocks and cryptocurrencies differ vastly in their history and evolution. Stocks have been in existence for centuries, with the first stock exchange founded as early as 1611. Since then, stock exchanges have been established in almost every country, expanding the market and enabling people to invest in major companies such as Google, Microsoft, and Apple, among others.

On the other hand, the crypto market is relatively new, having been created just 13 years ago in 2009. However, it has experienced rapid growth and attracted a significant number of investors. Nevertheless, the market’s short history casts doubt on its reliability and makes investors skeptical of it, unlike the stock market, which has a long track record that investors trust.

Diversity

Diversity is a significant difference between stocks and crypto. Any company that meets the requirements to go public and be listed on a stock exchange can sell its shares to raise capital. This means that investors have a wide range of options to choose from when investing their money. There are stocks from various sectors, such as technology, healthcare, construction, and oil, among others. This diversifies the investors’ portfolio, and if one sector experiences a significant loss, it will not affect their entire investment.

On the other hand, almost all cryptocurrencies are associated with blockchain technology and its development. Despite the existence of over 21,000 cryptocurrencies, most of them operate in the same field, making diversification difficult. Most cryptocurrencies are dependent on the price of Bitcoin, which means that if Bitcoin’s price falls, the value of other cryptocurrencies will likely fall as well. This makes it challenging to manage risks and increases the possibility of significant losses. For example, in early 2022, when Bitcoin’s value started to decline, almost every other crypto followed suit and began to lose its value. If you had invested in the top 10 cryptocurrencies by market cap, you would have suffered significant losses. However, if you had invested in the top 10 stocks by market cap, the fall of Apple, the largest company by market cap, would not have affected all the other companies in the same way as the fall of Bitcoin influenced all of crypto.

Laws and regulations

Cryptocurrencies and stocks differ not only in terms of their nature but also in the regulations governing them. Given that stocks have been around for centuries and the world’s biggest companies operate in this market, the government has put in place strict rules and regulations to oversee it. These regulations give the government the authority to scrutinize any company listed on the stock exchange to ensure that there are no fraudulent activities taking place. With the huge sums of money involved in the stock market, there is a risk of fraudulent activities, but the government is there to prevent them. Companies and individuals caught engaging in these illegal activities can face heavy fines and even prison time.

On the other hand, the crypto market is not as tightly regulated as the stock market. Cryptocurrencies are designed to be decentralized and anonymous, which makes it difficult for regulators to enforce traditional laws and regulations. While the decentralization and anonymity of cryptocurrencies have some benefits, the crypto market has become a haven for money launderers and other criminals. However, some governments have started to regulate centralized crypto exchanges, while decentralized exchanges remain largely unregulated. This means that you can freely buy and sell cryptocurrencies on decentralized exchanges without providing your personal information.

Scams

Both the crypto and stock markets have scammers operating within them, but there is a difference in the difficulty of executing these scams. This difference is due to the regulations that govern these markets.

Stock markets are highly regulated, which means that major scams are not very common. To pull off a large-scale scam in the stock market, one would require a lot of connections and capital to cover their tracks. For instance, companies cannot just list their stock on major markets like the New York Stock Exchange or the London Stock Exchange, as they have to pass several inspections before selling their stock there. Moreover, selling stocks requires investors to conduct in-depth analyses before investing in any stock.

On the other hand, crypto exchanges are not as tightly regulated, making it easier to scam people. Most crypto exchanges are competing with one another, and to gain a competitive edge, they might not screen certain cryptocurrencies thoroughly before listing them on their exchanges. This makes it easier to list your cryptocurrency on major crypto exchanges. Also, since cryptocurrency investors are most active on social media platforms, it is much easier to advertise your token and create a false narrative. As most crypto investors are not well-versed in cryptocurrencies and are simply looking to find the next Bitcoin, it is relatively easy to convince them to invest in random crypto projects. Ruja Ignatova, a Bulgarian businesswoman who is currently on the FBI’s top 10 most wanted list, managed to convince people to invest in a cryptocurrency that was not crypto at all. She duped investors out of $2 billion before people realized the trick. It is worth noting that there have been significant scams in the stock market, too, but the difference is the difficulty of executing them.

Should I invest in stock or crypto?

When deciding between investing in stocks or cryptocurrencies, it’s important to consider your investment goals. If you believe that cryptocurrencies are the future of finance and the internet, then investing in crypto may be the right choice for you. However, you should be prepared for significant fluctuations in value over time.

On the other hand, if you value stability and security in your investments, then stocks may be a better option. Since stocks are tied to tangible assets, such as company earnings, you can easily diversify your portfolio to reduce risk.

If you’re still unsure about which option to choose, it may be best to invest in both stocks and cryptocurrencies. By diversifying your portfolio across both asset classes, you can benefit from the strengths of each market. You can divide your investment evenly between the two or allocate more to stocks while still being mindful of the high volatility associated with cryptocurrencies. To further reduce risk, consider investing in stocks from companies in different industries and cryptocurrencies with different uses.

FAQs on stock vs crypto

Is crypto more volatile than stock?

Cryptocurrencies are generally more volatile than stocks. This is because hard assets do not back cryptocurrencies, and their value depends purely on speculation and people’s belief in them. As a result, their price can fluctuate significantly throughout the day, sometimes by over 10%. Stocks, on the other hand, tend to be less volatile since they are tied to companies. Unless there is a major event, their price remains relatively stable, with a daily change of around 2-3%.

Is crypto riskier than stock?

Cryptocurrencies are widely regarded as more risky investments than stocks. The reason for this is that cryptocurrencies are volatile assets whose value is largely based on speculation. As a result, they can easily lose value without any forewarning or clear justification. On the other hand, stocks have a much longer history and are intrinsically tied to tangible companies that are expected to remain stable. For this reason, investing in stocks is generally considered a less risky and less volatile option than investing in cryptocurrencies.