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 are known as “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.
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.
Key Differences
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 what people have.
However, a few of the most important differences are:
Diversity
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.
Volatility
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.
Profit Source
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.
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