Cryptocurrencies vs Stocks: Which is the Best Choice for You?

Cryptocurrency has taken the world by storm, especially over the past few years. The total value of all these digital currencies has ballooned to about $2 trillion, according to Bloomberg. Among these currencies, bitcoin is the most popular, with a value of more than $800 billion, according to CoinMarketCap.com. Investors rushed into this digital gold rush, often with little knowledge and much hope.

The rapid appreciation of cryptocurrencies has led many investors to question the place of stocks in their portfolios. But there are many differences between stocks and cryptocurrencies. Most importantly, the stock is an ownership interest in a company (backed by the company's assets and cash flow), while in most cases digital currency is not backed by anything at all.

If you are buying cryptocurrencies, it is important to understand what you are buying and how it compares to traditional investments like stocks, which have a long-term track record.

Should you invest in cryptocurrencies or stocks?

Any experienced investor needs to know exactly what they are investing in. It is critical that he weighs the risks and rewards of the investment, and what will drive the success of the investment. If they don't have that kind of information, they won't be able to make the calculation. In this case, it's not really about investing - it's more like gambling.

Here are the main things that investors need to know about stocks and cryptocurrencies.

stock

A stock is a partial ownership interest in a business. It's easy to lose sight of this, if you are overwhelmed by fluctuating stock prices - and the potential for profit. As a legal ownership interest in the company, the stock gives the shareholders a claim to the assets and cash flows of the company. These support your investment and provide a basis for its evaluation.

Why Stocks Rise and Fall: The stock price moves as investors evaluate the future success of the company. While investors may be over-optimistic about the stock in the short term, the price of the stock ultimately depends on the company's ability to increase its earnings in the long term. That is, the stock is rising in the long run due to the success of the underlying company.

For a stock to be a successful investment, the underlying company must do well over time. (Here's a step-by-step guide on how to invest in stocks.)

Cryptocurrency

In general, cryptocurrencies are not backed by hard assets (niche stablecoins are an exception), which is the case for more popular cryptocurrencies such as Bitcoin and Ethereum. A digital currency may allow you to perform certain functions, such as sending money to another person or using smart contracts that are executed automatically after certain conditions are met.

The reason for the rise and fall of the digital currency: Since the digital currency is not backed by assets or cash flow, the only thing driving crypto prices is sentiment-driven speculation. As sentiment changes, prices change - sometimes drastically. So the digital currency is driven only by the hope that someone will buy it for more in the future – the so-called “deceptive investment theory.”

For digital currency to be a successful investment, you have to get someone to buy it from you for more than you paid for it. This means that the market should be more optimistic than you.

Pros and Cons of Investing in Cryptocurrencies VS Stocks

Pros of investing in cryptocurrency

  •  For some investors, one of the biggest attractions of digital currencies is their decentralized nature. It is not controlled by central banks or governments that want to print money and generate inflation in fiat currencies such as the US dollar or the euro. Some investors have dubbed the digital currency “digital gold” because they believe it will protect them from inflation.
  • Big Gain Potential: Buying cryptocurrencies creates the potential for big gains on your investment. Many cryptocurrencies have seen a sharp rise in their prices since they were first introduced. These gains are the main reason people are drawn to cryptocurrencies, but the potential for price increases comes with significant risks.
  • Coins Growing: In the early days of cryptocurrency, there were only a few coins to invest in, but interest in speculation has changed that. New coins are introduced regularly and there are now thousands to choose from.
  • Broad interest in cryptocurrencies: There appears to be a growing interest in cryptocurrencies from investors, businesses, and governments. Tesla keeps bitcoin on its balance sheet and briefly accepted the digital currency as a payment method before reversing course. El Salvador adopted bitcoin as legal tender in 2021, although the International Monetary Fund has urged the country to reverse its decision. Increased acceptance of cryptocurrencies may be positive for investors.

Disadvantages of investing in digital currencies

  • High Volatility: Cryptocurrencies have been very volatile so far in their relatively young existence. They are not backed by anything, so the price at which they trade is determined by the whims of the traders. Wealths can be made and lost quickly and the currency cannot be traded anymore.
  • Cyber ​​Security Risks: Although crypto enthusiasts are touting the security benefits of digital currencies, there have been notable hacks related to digital currencies. It is often difficult to recover stolen funds.
  • No intrinsic value: Cryptocurrencies have no intrinsic value, which means they are not backed by underlying assets or dividends as they are in stocks. Stocks have value due to the strength of their future earnings and what they will return to their owners, while digital currencies offer nothing of the sort.
  • Regulatory risks: While El Salvador has embraced Bitcoin, many governments are more skeptical of cryptocurrencies. China has banned them outright and other countries can follow suit.

Pros of investing in stocks

  • A Long History of Strong Returns: Stocks have a long track record of delivering solid investment returns, with the S&P 500 returning about 10 percent over the long term. Although stocks can be volatile in the short term, they have generally been safe to hold for long periods of time.
  • It has intrinsic value: A stock represents an ownership interest in a company and its value over time depends on the success of the underlying company. Companies own assets that generate profits and cash flow for investors, creating what is known as intrinsic value.
  • Accessibility: Investing in stocks is easier than ever with many online brokers reducing trading fees to zero. You can invest in individual stocks or choose to buy a diversified basket of stocks through an index fund. Index funds help keep costs low and you can create a diversified portfolio even if you don't have a lot of money to start with.
  • Stronger regulation: All stock exchanges, brokers, and companies are strictly regulated by various government agencies. Corporations are required to provide certain information to investors through the Securities and Exchange Commission. There is no perfect regulatory body, but stocks have been around for a long time and certain investor protections are in place.

Disadvantages of investing in stocks

  • Volatile: When you own a large basket of stocks through index funds, stocks are less volatile than cryptocurrencies. Individual stocks can be more volatile, but they are usually less volatile than cryptocurrencies. Because of this volatility, it is best to hold stocks as part of a long-term investment plan, so you have time to recover from any short-term losses.
  • Lower Potential for Big Gains: Broad stock indices like the S&P 500 are likely to have a lower potential for extreme gains that can sometimes be found among cryptocurrencies. Stocks are back 10 percent over the long term, while it's not uncommon for cryptocurrencies to move 10 percent in a single day.

Other Considerations When Investing in Stocks VS Cryptocurrencies

time horizon

Your time horizon - when you need money from an investment - is a key criterion. The shorter your schedule, the more secure your asset should be, so it's there when you need it. The more volatile the asset, the less suitable it is for those with a short schedule. In general, experts suggest that investors in risky assets such as stocks need at least three years to weather volatility.

stock

  • Stocks are often volatile, but they tend to be less volatile than digital currencies. Individual stocks are more volatile than a portfolio of stocks, which tends to benefit from diversification.
  • Stocks are more suitable for investors who can leave their money alone without having to access it. In general, the longer the investment, the better.
  • Some stocks can be more volatile than others. For example, growth stocks tend to fluctuate much more than the value of dividend stocks or shares.
  • Investors may switch from stronger stocks (growth stocks) to safer stocks (dividend stocks) where they need to tap their money, such as when they are nearing retirement.

Cryptocurrency
  • While stocks are volatile, digital currency is ridiculously volatile. For example, during 2021 Bitcoin lost more than half of its value in a few months and subsequently rose by 100%. This volatility makes crypto unsuitable for short-term investors.
  • Crypto is more suitable for traders who can leave their money tied up and wait for it to recover. Think years instead of weeks.
Portfolio Management
  • When you're thinking of building your portfolio, you don't have to choose between cryptocurrencies and stocks — or other types of assets like bonds or funds, either. It's all about weighing your portfolio in a way that fits your risk and time horizon.
Cryptocurrency
  • Due to its inherent risks, digital currency works best with a small allocation in your overall portfolio. Think 5 percent or less.
  • Even a small allocation can do wonders for your wallet if cryptocurrency really takes off. Also, a small allocation limit protects you from a complete loss if the encryption is not going anywhere.
  • If the digital currency grows to become a large part of your portfolio, you can reallocate more of your money to stocks to reduce the overall risk of your portfolio.
stock

  • Due to a strong long-term stock track record, a variety of stocks should make up the majority of your portfolio, especially if you have contracts until you need to click on them.
  • If you are investing in individual stocks, you will need to research your stocks carefully to achieve good returns.
  • If you invest in funds, you can buy a broadly diversified fund like the S&P 500 Index Fund without much research and enjoy the potential for high returns.
The bottom line

The prices of some cryptocurrencies have skyrocketed since their introduction over the past few years, but investors need to understand what they are investing in, rather than just rushing in because other traders are doing so. If you decide to acquire a stake in crypto, consider how appropriate it is to take on the risks and your financial needs. Investors can earn good returns without investing in cryptocurrency, and some investors, including legends like Warren Buffett, will not deal with cryptocurrency.

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