Stocks and cryptocurrencies are dramatically different investment assets. While both are generally liquid assets that belong in the speculative side of your portfolio, the similarities end there. These are very different types of securities and belong in very different parts of your portfolio. Here’s a summary of these two types of securities. A financial advisor can help you decide whether either or both of these are a good fit for your portfolio.
What Are Stocks?
Stocks represent ownership in a publicly traded company. Each share of stock you buy confers a percentage of ownership in the company itself. You receive this ownership in proportion to the number of shares that a company has issued.
For example, say that XYZ Corp. releases 50% of its ownership in the form of 50 shares of stock. If you buy one of these shares of stock you will literally own 1% of XYZ Corp. (While uncommon, when a company has released more than half of its ownership in the form of stock, it is possible to acquire the firm simply by purchasing enough of its stock.)
An investor can make money by selling their stock shares to other investors. This is known as capital gains, the difference between what you paid for the asset and what you get from selling it. Beyond that, the benefits that you get from owning stock depend entirely on the individual company involved. Stocks can also gain value by paying dividends to their investors, through voting power held by shareholders and by other rights of ownership. Every individual company is different in terms of how (or if) it handles issues like dividends and shareholder voting rights.
What Are Cryptocurrencies?
A cryptocurrency is a purely digital asset. This means that it has no physical component but rather exists only as entries in an online ledger recording ownership. This is, for example as opposed to the U.S. dollar which has both a physical component (you can withdraw and hold a dollar bill) and a digital component (you can own a dollar as nothing more than an entry in your bank account recording that ownership). The individual unit of a cryptocurrency is called a token, in the same way that the individual unit of a stock is called a share.
Cryptocurrencies come in two main varieties. Some, like the well-known Bitcoin, are intended as pure currencies. They exist only for people to trade, buy and sell. Others, like Ethereum, are what is known as a “utility tokens.” These currencies function as part of a more complex piece of software, although utility tokens are also meant to be bought, sold and traded.
At time of writing there are several thousand different cryptocurrencies in circulation.
For an investor there are critical differences between investing in cryptocurrency and investing in stocks. However, as a threshold matter, it is important to understand that this article is merely a brief introduction to the issue. You could write volumes on the nature of crypto vs. stock investment, and people have.
However, a few of the most important differences are:
Both stocks and cryptocurrencies offer thousands of potential investment opportunities. At the time of writing, the combined listings of the New York Stock Exchange and NASDAQ alone offered more than 6,000 potential companies in which to invest. At the same time, various cryptocurrency marketplaces offer between 10,000 and 12,000 potential cryptos. (This number changes rapidly.)
However, these markets are not necessarily as diverse as they appear. At any given time somewhere between 55% and 70% of the entire cryptocurrency market is tied up in Bitcoin. That one asset dominates this market in a way not seen among stock exchanges, where almost any company can be a potentially valuable investment.
That said, stock markets shouldn’t get too proud of this distinction. While no one stock dominates its market, there are similarities in the FAANG stocks. These five companies (Facebook, Apple, Amazon, Netflix and Google) make up roughly one-fifth of the entire S&P 500. It isn’t the dominance of Bitcoin, but investors should be aware of similar market capture dynamics.
Cryptocurrency is likely the single most volatile asset in which you can invest. This is true of both individual assets and the market at large. Whether you have purchased Bitcoin or an altcoin (slang for literally every other asset on the cryptocurrency market), crypto is a roller coaster. Assets can triple in value and then lose it all within the span of a single day. Investors can make a fortune that way, to be sure, but many more lose their shirts.
Individual stocks almost always have far less volatility than cryptocurrency, but they’re still not stable. In fact until crypto came along shares in a single stock were generally considered the most volatile investments you could make. However, despite the random walk of individual assets, the stock market as a whole tends to be generally stable and predictable. It generally moves slowly, so much so that big changes in the stock market as a whole make the news.
If you want a stable asset, an S&P 500 index fund is usually a safe bet. If you want a speculative asset, an individual stock is a good choice. If you want an extremely volatile asset, crypto can serve that role well.
You can generally profit off of stocks in two ways. First, you can make capital gains by selling your shares to another investor for more than you paid. Second, you can hold the stock and collect dividends if the company behind the stock chooses to make dividend payments.
From time to time a company may buy back its own stock, creating a more guaranteed form of capital gains.
You can only collect profits off cryptocurrency through capital gains. While utility tokens offer a complicated series of software solutions, ultimately any crypto on the market can only be turned into dollars by selling it to another investor. (Furthermore, despite nearly 10 years’ worth of industry-wide development, at time of writing no utility token has turned its software into a marketable product.)
This makes cryptocurrency somewhat more speculative than stocks tend to be. A pure cryptocurrency, ultimately, is only worth what the next investor is willing to pay for it. There is no underlying asset to influence or stabilize that value. This means that cryptos are subject only to technical analysis. Stocks, on the other hand, have an grounded asset in the form of the company behind the shares. This creates room for fundamental analysis on a stock’s value, as you can evaluate what the underlying company is worth regardless of market dynamics.
Trading & Regulation
Like all securities, stocks are some of the most heavily regulated assets that you can trade. The SEC monitors public shares closely and does the same for the markets on which those shares are traded.
Investors trade most stocks on a handful of large, centralized exchanges. Almost all stock trades in the United States, for example, are conducted on the New York Stock Exchange and the NASDAQ. Any given stock will only be listed on one exchange at a time. While you can trade shares privately, this is relatively rare and typically done only with unlisted and “penny” stocks.
Cryptocurrencies do not yet have any kind of centralized exchange system. Instead a network of hundreds (if not thousands) of independent companies run their own small exchanges where individuals trade cryptocurrencies among themselves. Although a few more popular cryptocurrency exchanges dominate coverage, there are no truly dominant players in this market.
This means that cryptocurrency is traded among individuals. Unlike the formalized stock exchange system, in which shares are traded through a third party known as a clearing house, most, if not all, cryptocurrency is traded directly between the buyer and seller. (Note – It is possible that this may change, as this market changes rapidly.)
While many advocates of cryptocurrency argue that the technology behind cryptocurrency has made clearing houses obsolete this is untrue. A clearing house functions as a middleman that brings buyers and sellers together. That helps to establish clear market prices for each asset. The absence of a clearing house function in cryptocurrency means that individuals who want to trade currencies need to find each other on an ad hoc basis. It also means that there is no centralized pricing mechanic for cryptocurrency. While investors have published market prices as a guide, ultimately the price of any transaction will depend on the market and even the traders involved.
This makes cryptocurrency a generally less liquid asset than stocks. While high-volume cryptocurrencies like Bitcoin and Ethereum don’t tend to have this problem, it generally takes longer to trade the thousands of less popular cryptocurrencies, and prices for those assets tend to be more unpredictable.
Cryptocurrency remains largely an unregulated asset class, as bodies like the Securities and Exchange Commission and the IRS decide specifically how to govern it. This has led to a surge in potential assets for investors to explore, which can be fantastic for aggressive portfolios.
However, it has also come at a cost. Estimates suggest that roughly a third of all new cryptocurrencies introduced to the market are fraudulent in some way. Most are either traditional pump-and-dump schemes or cash-grabs for an asset that will never be released.
Investors have also often been bitten by loose enforcement of existing regulations in this market. It has become common for popular voices in the crypto community to swing the price of individual assets with a single tweet or Reddit post. This kind of behavior happens comparatively infrequently on the stock market, as doing so with a regulated asset is a felony.
The Bottom Line
So, which asset should you invest in? Cryptocurrency is an exciting, boom-and-bust asset that has attracted an enormous amount of interest in a short time. If that interests you, invest only with the most speculative segment of your portfolio, money you’re comfortable losing. Individual stocks are linked to the performance of an underlying company, which grounds the stock’s price. These are still volatile and risky assets, but not nearly to the same degree as cryptocurrencies.
Investors looking for a mix of growth and risk management should consider stock market index funds. These are not subject to the same gains as cryptos or stocks, but nor are they exposed to the same risks.
Tips on Investing
- How should you balance the kind of wild ride (but potentially high-performing) assets offered by crypto against the more ordinary investments of a stock? Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- To get a good idea of how your investments could be expected to do over time use SmartAsset’s free investment calculator.
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