Cryptocurrency and stocks are very similar and yet very different. If you’re juggling the option of investing in either crypto or stocks, you need to know how both behave. You should also know their merits and demerits. We will discuss all of these in this guide to help you make an informed decision.
What Are Stocks?
A stock represents a partial ownership interest in a business. Stocks give shareholders a claim on the assets and cash flow of the business they invested in; if the business prospers, they profit and lose otherwise.
What Moves Stock Prices?
Stock prices move as investors assess the future success of the business. Therefore, a stock rises due to the success of the underlying company. The stock dips if the company experiences setbacks.
Pros of Stock Investments
Long Record of Positive Returns
Unlike cryptocurrencies, stocks have been around for a long time and have a good track record of being profitable. Stocks can be volatile in the short term, but they are quite stable and safe in the long term.
A stock is a fractional ownership interest in a company, and the stock’s value depends on how successful the company is. The intrinsic value of a stock is determined by the assets and cash flow of the underlying company.
It is now very easy to invest in stocks with a wide range of options provided by brokers. You can also invest in a variety of stocks through an index fund, which helps you keep a varied portfolio.
Better Regulatory Frameworks
The activities of legitimate brokers, stock exchanges, and companies offering stocks are strongly regulated. Stock buyers are kept safer by the regulations put in place.
Cons of Stock Investments
Individual stocks can be volatile, especially in the short term. However, a diverse portfolio through index funds can be less volatile.
Lower Potential for Huge Profits
Stocks usually move slowly in the long term. This means that their potential for enormous gains is limited. Stocks typically return about 10% in the long term; it’s not unusual for cryptocurrencies to move 10% in a day.
Cryptocurrencies are digital currencies that rely on blockchain technology. They can be used as a medium of exchange or to carry out smart contracts, among other things.
What Moves Crypto Prices?
Unlike stocks, cryptocurrencies (except stablecoins) are not backed by assets or cash flow. Crypto prices are driven by sentiment. This explains why cryptocurrencies are so volatile.
Pros of Crypto Investments
Possible Security Against Fiat Currency
Some people hold cryptocurrencies because they believe it will protect them from inflation, which is suffered by fiat currencies.
High Potential For Extreme Profits
We have seen the value of several cryptocurrencies rise sharply. Holding cryptocurrencies gives you the potential for huge returns on your investment. This attracts many people to crypto, but the huge potential comes with risks.
Growing Number of Coins
There were only a few cryptocurrencies available a decade ago. Today, there are thousands, and the number keeps growing. This means the freedom to choose from various cryptocurrencies with different possibilities.
Growing Interest in Cryptocurrencies
More people are getting into crypto, including high-profile companies like Tesla. Two countries now accept bitcoin as legal tender. This means that interest in crypto is growing and will most likely continue to grow.
Cons of Crypto Investments
Crypto’s greatest merit is also its greatest demerit. Due to crypto’s high volatility, there’s a huge potential for making profits. That means there’s also a high risk of losing money.
The digital nature of cryptocurrencies means that they are liable to hacking and other security risks. This threat does not lie with individuals alone; there have been several attacks on notable crypto service providers.
No Intrinsic Value
Cryptocurrencies are not backed by any concrete assets; their values are based on market sentiment. The exceptions are stablecoins.
Cryptocurrencies like bitcoin were created to reduce the influence of regulatory bodies on the means of exchange. This is a hindrance to their general acceptance by some countries.
Which Should You Choose?
Cryptocurrencies and stocks are investments with a level of risk. Cryptocurrencies are generally riskier than stocks, but they promise higher returns within short periods. Before choosing crypto or stocks, consider how they align with your financial needs and risk tolerance. Do not invest in crypto just because others are; note that some investing legends like Warren Buffett have no interest in cryptocurrency.