When investing in stocks vs. cryptocurrency, there are crucial differences you should understand. Get help deciding which is right for you.
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The history of investing has been full of innovations and trends. Cryptocurrency is the latest of these crazes, leading to a stock vs. cryptocurrency debate.
As cryptocurrencies such as Bitcoin and Ethereum have jumped in value, millions of investors have tried to profit off the rise of digital payment systems. Some people have even stopped investing in traditional stocks altogether in hopes of scoring big by investing in crypto.
But is this wise? Read on to read more about stocks vs. cryptocurrencies, and which is a better choice for investors like you.
What Are Stocks?
Stocks — also known as equities — are a type of security you can purchase to gain ownership in a company. Investors own individual shares of stocks. Those who purchase stock hope to make money through both capital appreciation and dividend payments.
The two major types of stocks are:
- Common stock. This type of investment allows the owner to both receive dividends and to vote during shareholder meetings.
- Preferred stock. This type of investment allows the owner to receive dividends before those who hold common stocks. Also, preferred stockholders are prioritized over common stockholders should the company go bankrupt or have its assets liquidated. However, the owner of preferred stock typically cannot vote during shareholder meetings.
Stocks also can be further divided into additional asset-class categories, such as growth stocks, value stocks, and income stocks.
Another way to categorize stocks is by the size of the company. There are large-cap, mid-cap, and small-cap stocks, for example.
Historically, investing in stocks has been among the best ways to build wealth over long periods of time. Over the years, millions of people have gotten wealthy by participating in stock market investing.
How do people invest in stocks?
There are many different ways to purchase stocks. Some people invest directly in individual companies and purchase shares of those companies. Investors typically make these purchases through a discount or full-service broker who charges a fee to buy and sell shares for customers
Other people invest in stocks through mutual funds, which are a pooled collection of assets that invests in stocks, bonds, or other securities.
Some mutual funds are actively managed, meaning a fund manager decides how to invest the money in the hope of outperforming market benchmarks. Other mutual funds are passively managed index funds that simply track an index, such as the Standard & Poor’s 500.
Finally, some people invest in stocks via exchange-traded funds (ETFs), another type of index fund. As with stocks, you can buy and sell ETFs throughout the day at their current market price. This differs from mutual funds, which are traded at the end of each market day.
Investors also choose specific types of stocks, mutual funds, and ETFs based on the asset class. One investor may buy a small-cap value mutual fund focused on U.S.-based companies, while another might purchase a large-cap growth ETF focusing on international companies, for example.
The decision on which type of investment to purchase typically depends on your investment goals and your beliefs about which asset classes are more likely to perform best over time.
What Is Cryptocurrency?
Cryptocurrency is a digital currency that people use to buy goods and services. The “crypto” part of this term refers to the fact that cryptography is used to secure the currency, protecting it from being counterfeited or spent more than once.
Over the past couple of years, cryptocurrency has become steadily more popular. Bitcoin and Ethereum are perhaps the best-known forms of cryptocurrency.
Unlike most forms of currency, cryptocurrency typically does not exist in a physical form. Instead, it is stored electronically, unless the owner uses a service to turn it into a physical token.
To use cryptocurrency as a form of payment, you typically must use your phone or computer to exchange it online. Banks are not involved in the transaction.
Typically, you use an online exchange platform to buy cryptocurrency, which then is stored in a digital wallet.
In some ways, cryptocurrency exists in a kind of “Wild West” atmosphere. Unlike traditional currency, governments do not back cryptocurrency. Its value also can fluctuate dramatically, making it a more volatile investment than most stock purchases.
There is no agency such as the Federal Deposit Insurance Corp. to insure an investment in cryptocurrency, which makes it unlike standard cash kept in a bank. If something goes wrong with cryptocurrency — such as an online platform going belly-up or making a mistake by sending cryptocurrency to the wrong recipient — you may have no recourse for getting the currency back.
How do people invest in cryptocurrency?
To invest in cryptocurrency, you need to open an account on a cryptocurrency exchange. Popular exchanges include Coinbase, Robinhood, and BlockFi. There are many different forms of cryptocurrencies, and a given exchange may not support trading of all of those currencies. So, it is important to do your research and know your goals before choosing an exchange.
Once you have added regular money to an exchange account, you can begin purchasing cryptocurrencies. Your purchases typically will remain in a custodial wallet that the exchange controls.
Another option for storing your cryptocurrency is offline in what is known as a “cold wallet.” In most cases, this is a device known as a “hardware wallet” that connects to your computer.
You can also store cryptocurrency in a hot wallet — a desktop, mobile, or web-based application that stores your cryptocurrency online — or an actual physical wallet, which are printouts of public and private keys. Usually, these are made up of a string of characters and scannable QR codes.
What’s the Difference Between Stocks and Cryptocurrency?
While stocks and cryptocurrency have some distinct differences, it can still be confusing for some new investors to understand how they compare. The table below can help clarify how these two investment vehicles differ.
People invest in both stocks and cryptocurrency for the same reason — to make money. But while this goal may be the same, there are some key differences between the two. They include:
The nature of the asset
When you buy a stock, you are purchasing shares in a company. In essence, you are taking a small ownership stake in that company.
By contrast, buying cryptocurrency is investing in a currency, not a company.
The level of volatility
Investing in both stocks and cryptocurrency involves volatility. There are times when you will make money, and times when you will lose it.
But the volatility of cryptocurrency tends to be much more significant than what you will experience investing in most stocks.
The regulations that govern trading
Most stocks are highly regulated. The U.S. Securities and Exchange Commission monitors shares and the markets in which they are traded. The lion’s share of stock trading occurs on large exchanges, such as the New York Stock Exchange and the NASDAQ.
By contrast, there is much less regulation of the trading of cryptocurrencies. This creates a higher risk of fraudulent activity. There also is no centralized exchange system for cryptocurrency trading. Instead, independent companies run their own exchanges.
The fees you pay for transacting
When you purchase a stock, you might pay a broker a fee or commission to make the trade. In addition, when you sell your shares, you often will pay a capital gains tax.
By contrast, with cryptocurrency, fees and other costs typically are lower.
Durability of the investment types
The history of stock trading stretches back hundreds of years. It is a firmly established practice, and the thought of it suddenly disappearing is almost inconceivable.
By contrast, cryptocurrency is the new kid on the block. Although many people make predictions, no one really knows what the future of cryptocurrency holds. It could be around forever, or it might be gone tomorrow.
Stocks vs. Cryptocurrency: Which Is Right for You?
Stocks and cryptocurrency both have their place in the world of investing. But that does not mean everybody should purchase these types of investments. The right choice for you depends on your goals, risk tolerance, and other factors.
Stock investing
This might be the right choice for you if you are someone with a long-term horizon who believes in building wealth slowly. Decades — even centuries — of stock trading history support the notion that trading in stocks is among the best ways to build wealth over a long time horizon.
While there is some risk involved in stock trading, a sensible approach to investing has a history of yielding great long-term results.
Cryptocurrency investing
This might be right for you if you like to live on the edge, or want to try to “get rich fast.” Fortunes already have been made in crypto, and investors may see similar results in the future.
Still, investing in cryptocurrency has a history of being volatile, and nobody knows what the future holds for this new type of currency. Many financial advisers steer their clients away from this kind of risky trading, believing that taking such large risks prevents most folks from achieving their long-term financial goals.
So, if you want to invest in cryptocurrency, remember the slogan “buyer beware” before you jump in.
The Bottom Line
Those who are investing for the long haul are likely to find their odds of investing success will be much higher if they choose stocks.
Those who like to take bigger risks — and who are not afraid of the danger of losing large amounts of money — may want to try their hand at cryptocurrency investing.
When it comes to stocks vs. cryptocurrency, only you, with help from your financial advisor, can decide which way of investing is right for you.
