Cryptocurrency vs. stocks may sound like a crazy debate to longtime traders and investors. After all, cryptocurrency was a footnote or an oddity just a dozen years ago. But it has emerged as a formidable force in the world of finance.
The meteoric growth of crypto has many investors considering entering the market.The total value of all cryptocurrencies passed $1 trillion in January of 2021, and some predict it could reach $11 trillion in 2023.
But despite its size, crypto has many important differences from traditional investments. Especially for new traders considering investing in crypto, here are some things to review as you enter the crypto vs. stocks debate.
Stocks: A Quick Review
A share of stock represents a percentage of a business. While stocks and whole sectors go in and out of fashion with investors, the stock itself still corresponds to a portion of a functioning company, with a price that reflects the value of that company.
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Cryptocurrency: A Quick Review
Cryptocurrencies are different types of digital assets created and stored digitally.
When you buy cryptocurrency, you own a set amount of currency. The value of a cryptocurrency reflects a variety of factors, including current supply and demand for that currency. In some cases, it also reflects a faith in the underlying technology that powers the currency.
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8 Major Differences Between Crypto and Stocks
Cryptocurrencies and stocks are very different assets. Here’s a look at some of the characteristics that set them apart.
To own stock, you typically need a brokerage account to handle the transaction. That account is verified by information like your address, Social Security number, signature and more. This offers some protection in the event of identity theft or fraud.
Cryptocurrency offers more anonymity. You keep your Bitcoin or other digital assets in a wallet, which can be fully virtual or even on a USB drive. That anonymity may create unique risks, such as losing currency to hackers or forgetting your password and access to the account. Or you could misplace your USB drive, and lose all your money. While anonymity has its advantages, it also has its risks.
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Stock exchanges have existed in some form or another for more than two centuries, most famously on Wall Street, in New York City. Cryptocurrency exchanges, on the other hand, are fairly new. The largest one, Binance, launched in 2017. Coinbase, another major player, was created in 2012.
Binance had a daily trading volume of just over $50 billion in May of 2021. At the same time, the Nasdaq, which is just one small part of the global stock market, had a trading volume that was five times that amount. And the Nasdaq is only 14.5 % of the total stock market by some estimates.
Smaller markets also affect the ability to trade in and out of your investments, whether they’re stocks or cryptocurrencies. That ability to trade at will is called liquidity. Investors typically consider stocks liquid, since there are so many active traders in the stock market.
With cryptocurrency, on the other hand, liquidity varies from one form of crypto to another. Bitcoin is more liquid than the twentieth biggest cryptocurrency, Polygon, simply because it has a higher trading volume. That means there are more buyers and sellers who want to trade if you want to get in or out of that particular cryptocurrency.
Both stock investors and crypto investors can fall victim to slippage, which involves losses when you have to sell a large amount of an asset during a period of low liquidity. However, the risk is higher for crypto owners, given the lower levels of liquidity in the crypto markets.
There is volatility and risk involved in buying both crypto and stocks. Both assets can go up or down in value, and it’s nearly impossible to time the market to know exactly the best time to buy or sell.
While the stock market has a well-earned reputation for volatility, the broader market has tended to go up over the course of decades. Since public stocks must publicly report on their finances, investors have access to several sources of information to make decisions about purchasing those securities.
On the other hand, cryptocurrency is more likely to undergo sudden, drastic changes in value, sometimes without warning, leaving some to particularly wonder why Bitcoin can be so volatile. That can lead to potentially huge wins for crypto traders, but it can also create large losses in a very short period of time. More than 1,600 forms of crypto have even vanished altogether. While it is possible for public companies to go bankrupt, they’re far less likely to lose all of their value than most cryptocurrencies are.
5. Trading Costs
Every time an investor buys or sells stocks, they may have to pay transaction fees that eat into their returns. Even investors who purchase low-fee, no-load index funds have to pay fees that go to a manager who buys and sells the stocks in the fund. The costs in other funds and for trading through a brokerage account will be higher.
But trading crypto can also come with substantial costs. Crypto exchanges charge fees. And there are “gas fees,” the costs extracted by the network to verify the validity of a given exchange on the blockchain that underlies the currency. Those fees vary widely from one form of crypto to another.
Some networks will raise the gas fees to speed up transactions. But by some estimates, the leading marketplaces charge at least 1.5% in fees to buy or to sell crypto. That will wipe out any gain under 3%.
There are national agencies such as the Securities and Exchanges Commission (SEC) in the United States, which oversee stocks and stock markets. The regulation by those companies ensures a certain level of transparency into the publicly traded companies.
By contrast, cryptocurrencies remain largely unregulated.
That’s a benefit to some investors, who may have mixed feelings about government regulation. Decentralized networks run each cryptocurrency, with individuals focused on maintaining their technology and ensuring the integrity of the currency. Still, all cryptocurrencies and exchanges remain at risk of facing drastic transformation or elimination by government regulation in the near future. In June, for example, the United Kingdom banned the Binance exchange from operating within the country.
7. Trading Hours
The stock markets are open during business hours in their home country, Monday through Friday, and closed on holidays on weekends.
By contrast, the crypto market runs around the clock, every day of the year.
Many investors aim to build a portfolio with diversified holdings that perform differently in different markets. In general, stocks often perform in correlation with the broader economy and are greatly impacted by factors like inflation.
Some proponents of cryptocurrency believe that it’s a non-correlated asset, meaning that it doesn’t react to market events like traditional securities such as stock and bonds. Some also believe that it could act as a hedge against inflation, making it a valuable counterweight in a portfolio that has more inflation-sensitive assets.
When comparing cryptocurrency vs the stock market, it’s important to remember that they’re very different assets that play potentially different roles within a portfolio. The right mix for you depends on your personal risk tolerance, financial goals, and current financial picture.
If you’re ready to start building a portfolio with stocks or cryptocurrency–or both–one great way to get started is by opening an account on the SoFi Invest® brokerage platform. Members can start with as little as $5, and make purchases directly within the app.
Photo credit: iStock/Velishchuk
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.