Investors have always had many options, but recently the market has offered another option. Cryptocurrencies join traditional options such as stocks, bonds, real estate and companies. Let's look at how crypto investments compare so far to the old stock portfolio.
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What is crypto vs. stocks?
Cryptocurrencies have attracted great interest from investors in recent years. Trading volume and token prices skyrocketed in 2017, fell for a few years, and then rose again in 2020. At its low point in November 2021, Bitcoin ( BTC -0.27% ) had a market cap of $1.2 trillion, while Ethereum ( ETH -0.06% ) had a total value of $540 billion.
Sudden and dramatic changes in cryptocurrency prices can be exciting. On a good day, the crypto market can seem like a get-rich-quick scheme, especially when you consider the smaller and more volatile types of altcoins.
Here too, peaks are usually followed by crashes and similarly sudden corrections. Bitcoin and Ethereum have been around for years, but many of these super-exciting altcoins have disappeared, much to the dismay of investors.
Of course, some of these characteristics also apply to stocks. Nothing is certain in any market and you must assume a certain amount of risk when investing your hard-earned money in any type of investment. However, there are significant differences between investing in cryptocurrencies and investing in stocks, and you should be aware of them before diving into cryptocurrencies.
Crypto vs. Stock Value
A key difference between stocks and digital currencies is that a stock represents ownership of an actual company. Stock investors can make investment decisions based on business results, cash reserves, growth potential and more.
A cryptocurrency's value may eventually exhibit similar characteristics as people begin using it in real-world transactions and crypto-based applications, but that day is yet to come. To date, the market value of a cryptocurrency has largely been determined by supply and demand. Can you find someone willing to pay more than what you paid when purchasing your crypto coin?
Crypto vs. inventory management
The stock market has a long history with over a century of regulations and laws that play a role in every transaction. Certain rules apply to trading, owning and managing your stock portfolio. You can earn an advanced degree and launch a full-fledged career in income tax in the stock market.
The cryptocurrency market has no regulatory framework. Various US government agencies are working on what crypto regulations should look like in the long term, but they are just getting started. Should cryptocurrencies be subject to the same rules as the stock market? Are they like fiat currencies like the US dollar, euro and Japanese yen? Or is it a completely different animal that deserves a whole new regulation? Perhaps not every cryptocurrency should be treated equally as different digital currencies have different technology platforms and long-term goals.
The regulatory future of cryptocurrency is open and many investors will not enter the cryptocurrency market until there is clear regulation.
Exchange cryptocurrencies for stocks
The initial experience of buying cryptocurrencies is not much different than buying stocks. You open an account with a cryptocurrency broker, transfer funds to this account, select a cryptocurrency and place an order with the broker. After a short break, you will have cryptocurrency tokens (or part of a token) in your crypto wallet.
Things may be very different behind the scenes, but if you've ever bought stocks before, the process of buying crypto should sound familiar. However, there are some differences:
- Crypto brokers are likely to charge a trading fee for each transaction – a practice that most stock brokers eliminated in 2018 and 2019. For example, the popular platform Coinbase ( COIN 5.09% ) charges a 0.6% transaction fee for crypto purchases under $10,000.
- A stock trade can be executed very quickly, whereas algorithmic trading systems can complete a trade in microseconds. Crypto transactions are slow because each new transaction must be approved and verified by the digital currency's blockchain network - a process that typically takes around 15 seconds for Ethereum transactions and several minutes for the Bitcoin network.
- Unless you insist on receiving a printed stock certificate, your broker will act as custodian of your stock holdings. This is not always the case with cryptocurrencies, as some investors insist on removing their digital currencies from centrally managed brokerage platforms and instead have a cold wallet in their possession.
Advantages of crypto over stocks
Cryptocurrencies can get very hot and skyrocket in the blink of an eye. Because their ratings are generally not constrained by financial results (or lack thereof) or other value-based investor concerns, there are no limits.
Many crypto investors hope to be among the first to invest before the next big project launches. The chances of winning a lottery ticket may be slim, but it can definitely happen. Others prefer cryptocurrencies due to their decentralized nature, advanced privacy features, powerful automation options where the currency offers smart contracts, and other advanced options that no stock or regular currency can offer.
Disadvantages of crypto over stocks
The lack of proper regulation increases downside risk for the crypto market. Until Congress figures out how to handle a trendy digital asset class, many investors will stay away, and with good reason. Institutional investors, in particular, will not be able to capitalize on new markets unless they understand how governments tax profits and how regulators deal with fraud in cryptocurrency trading systems.
Slow transactions can also be a problem for some merchants. A rise in cryptocurrency prices can collapse just as quickly.
How can you be sure that cryptocurrencies and crypto brokers are protected from hackers? And what if you upload your crypto holdings to a secure local wallet and then forget the password? These incidents have occurred in the past and may occur again.
Crypto vs. Investment Businesses
Simply put, you'll likely lose more sleep worrying about the security of your cryptocurrency than worrying about your stock portfolio.
If you are an experienced investor, you may want to add cryptocurrencies to your portfolio, but you should do so in small steps and make sure you learn everything you can about the cryptocurrency market.
If you have no investment experience, you should not jump in straight away. You will gain a better understanding of the basics of investing in the stock market and long-term thinking.
You can get into crypto opportunities without even opening a crypto brokerage account. Many reputable companies are exploring the cryptocurrency phenomenon from various unique angles, including the added security of a reputable business operation. For most people, investing in these companies is probably the best place to start when thinking about investing in cryptocurrencies.
Related Investment Matters
What does the future of cryptocurrencies and stocks look like?
The characteristics, challenges and opportunities of the cryptocurrency industry will continue to evolve over time. Regulations are being developed, but it is still too early to say what the final regulatory framework and the future of cryptocurrency will be. Meanwhile, the stock market continued to move slowly, recovering from the growing pains of a few decades ago.
So for now, stocks are inherently safer than cryptocurrencies, and the calm waters of the stock market can still create life-changing wealth. Given the speculative nature of this exciting but largely unproven opportunity, you should limit your exposure to cryptocurrencies for now.