Crypto vs. Stocks – What’s the Difference?
When most people think about investing, they think about the stock market. This has historically been the asset market most accessible to the average investor.
However, that may be changing. More and more people are becoming exposed to cryptocurrency as a digital asset. As a result, adoption rates soared over the past year, and the global crypto market cap rose to over $2.9 trillion.
For traders and investors, both crypto and stocks present significant opportunities for financial gain. And they are beginning to be more connected than ever. According to the International Monetary Fund, there is a growing correlation between cryptocurrency and the stock market.
For example, the correlation between the price of Bitcoin and the S&P 500 rose from 0.1 in 2017-19 to 0.36 in 2020-21. This suggests that cryptocurrency is no longer on the fringe of the financial system. On the contrary, it’s more important than ever for investors to know crypto and decide if it deserves a place in their portfolios.
What are cryptocurrencies?
Essentially, cryptocurrency is digital money. You can use it as a medium of exchange for goods or services on the internet. Crypto – except for certain stablecoins – generally isn’t backed by a hard asset. Instead, it derives value from its underlying technology, its usefulness for innovative forms of decentralized finance, and public sentiment in the market.
Many cryptocurrencies work similarly to digital payment systems you’re already familiar with, like PayPal. But instead of transferring fiat currency, you’re exchanging digital assets.
Others function more like investment assets like gold. Many people see cryptocurrency as a hedge against inflation in fiat currency, based on the performance of the crypto market as a whole over the past several years.
But cryptocurrency is more than just an investment asset or a way to send digital money. New blockchain applications built on platforms like Ethereum use cryptocurrency to power their ecosystems. There are gaming platforms, smart-contract-based insurance models, smart energy grid programs, and a whole suite of decentralized finance applications. Overall, crypto is a rapidly growing industry that is expanding its use cases every day.
What are stocks?
Stocks have a much longer track record than cryptocurrency when it comes to investment assets. And stocks still account for the majority of people’s exposure to investing.
A stock represents a fractional share of ownership in a company. The stock price reflects the company's performance and moves up and down depending on the company’s success. So, the value of a stock is backed by the market’s perceived value of a company, as well as its financial performance.
When you own a stock, you have a legal claim to a percentage of that company’s assets and cash flow. You can sell that stock when a company performs well to make a profit. You can also invest in a group of stocks known as an index fund to give you a more diverse portfolio.
What are the similarities between crypto and stocks?
When you buy crypto or stocks, you’re connected to an exchange where buyers are matched to sellers of digital assets. These assets both fluctuate in price according to supply and demand.
Here are some of the main similarities between crypto and stocks.
Buying crypto and stocks is a fairly similar process. Most trading platforms offer the same basic trading order types.
For example, you can place a market order, a limit order, a stop order, or other types of more advanced orders. In terms of crypto, some decentralized exchanges also offer alternative order types, such as “swaps,” where traders exchange crypto tokens for an equivalent value of different tokens.
Volatility and risk
There are inherent risks when it comes to trading both cryptocurrency and stocks. Both can be highly volatile assets, potentially gaining or losing hundreds of percentage points in a single day.
However, while stocks can be volatile, they are still considered less volatile than cryptocurrencies. Bitcoin, the largest cryptocurrency, has seen several rapid peaks and dips that have made some people fortunes while costing others huge losses. It is not uncommon for smaller cap cryptocurrencies to jump thousands of percentage points on the back of a mention by an influential celebrity or a social media hashtag.
Furthermore, hundreds of cryptocurrencies have lost all their value in the span of a few hours or days. While it’s possible for a publicly-traded company to go bankrupt and its stock to lose value, this usually doesn’t happen as quickly as it can happen in crypto.
Remember, it’s impossible to predict market movements consistently and accurately for either crypto or stocks. So traders should always be careful to conduct their own research before buying or selling assets.
Trading and exchange fees
Trading crypto and stocks both require fees. Each time you buy or sell an asset, you must pay a fee.
For stocks, these fees are often paid to a broker who manages your portfolio. Or, it can be paid to an online brokerage platform that functions in the same role.
When it comes to cryptocurrency, different exchange platforms charge varying amounts of fees. Some only take a percentage of purchasing orders, while others offer free deposits and withdrawals. You must also pay fees when sending cryptocurrency to a different address. These fees can be as low as fractions of a cent or over a hundred dollars depending on the token type and the total amount sent.
What are the key differences between crypto and stocks?
Even though crypto and stocks are both used as investment assets, they have several fundamental differences. Some of them are:
When you buy a stock, it entitles you to a fractional share of ownership in the issuing company. This gives the stockholder various privileges such as voting rights or capital gains. However, if you buy stocks through a broker, they technically own the shares.
In contrast, owning cryptocurrency means you have full possession of those coins or tokens. You do not own a share in the company that issued the crypto. However, many tokens still entitle the holder to certain privileges like voting on platform development or receiving rewards from the issuing company.
When you own cryptocurrency, you can either leave it on the exchange or transfer it to a crypto wallet for safekeeping. Online wallets are more convenient, but hardware wallets store your tokens offline and are considered the safest option.
Stock markets are limited to business hours. For instance, most North American stock exchanges operate between 9:30 AM to 4:30 PM Eastern Time.
In contrast, crypto markets are open 24/7. This allows people from all over the world to buy and sell crypto anytime, anywhere.
The stock market is heavily regulated. National agencies such as the Securities and Exchanges Commission (SEC) keep a close eye on exchanges, brokers, and the companies that issue stocks. Failure to comply with regulations could result in heavy fines or jail time.
When it comes to crypto, the global market lacks a consistent regulatory framework. And since crypto exchanges can be accessed from anywhere in the world, it presents a challenge for law enforcement agencies that seek to control criminal activity.
Each country takes its own approach to crypto. However, many countries are beginning to introduce tighter regulations that could significantly impact the crypto market as a whole.
Since there are so many participants in the stock market, stocks are generally considered a highly liquid asset. As a result, it’s not difficult to find buyers or sellers of publicly traded stocks.
On the other hand, crypto liquidity varies from token to token. On the higher end of the market capitalization rankings, cryptocurrencies like Bitcoin and Ethereum have no liquidity issues. This is because their daily trading volumes are in the billions of dollars. However, coins with a smaller market cap can suffer from low liquidity depending on the exchange.
Publicly traded companies listed on the stock market are legally required to provide financial transparency. This includes access to annual reports, regular financial updates, shareholder meetings, and more. These requirements are intended to protect investors from fraud and other misinformation.
In contrast, since crypto is relatively unregulated, it’s often up to individual projects to publish their own data. There is progress toward more transparency for the crypto market as a whole. However, there is still a lack of consistency and enforceability.
Building a diversified portfolio
For many people, the saying, “Don’t put all your eggs into one basket,” rings true. The standard advice for investing is to build a diverse portfolio to reduce risk and increase the potential for profits.
Increasingly, this means adding cryptocurrency to your portfolio of assets. But each investor should be fully aware of the risks in investing in a volatile asset and never put in more than they can afford to lose.
Short term vs. long term investing
Long-term investing is preferred over short-term investing because it reduces the negative effects of volatility. If you invest with a long-term mentality, you’re more likely to ride out the peaks and dips with patience instead of panic buying or selling.
Investing in the stock market is generally considered a stable long-term strategy. Over time, index funds like the S&P 500 have demonstrated steady, predictable gains. However, unless you plan on day trading, the stock market does not usually return large profits in a short period.
On the other hand, many people diversify their portfolios and use crypto as a short-term investment strategy. This is due to crypto’s volatility. It’s not uncommon for coins to shoot up or down by hundreds of percentage points in a single day. Therefore, crypto traders stand to make significant profits but can also suffer heavy losses.
Crypto vs. stock day trading or investing
There is no single strategy that will guarantee profitability. As a result, many smart investors use both crypto and stocks for day trading or investing.
However, to make a case for crypto, it’s worth considering Bitcoin’s performance over the last decade. It has outperformed all other asset classes by a factor of 10. Yes, you read that right. Bitcoin had an average annualized return rate of 230% over the last ten years. That’s more than ten times higher than the second top-performing asset, the Nasdaq 100. Pretty impressive, isn’t it?