Cryptocurrencies and stocks have their differences. Despite them both being speculative and providing investment opportunities, the two can be unalike in many ways too. Any new investor may still be unclear on the differences and wonder which would make a more suitable investment for them. In this article, we will contrast the two, and figure out which investment could be more well suited to you.
Stocks (also known as shares) represent ownership of a portion of a company. If you hold a stock, then you own a small percentage of its corresponding enterprise. As a stockholder, you may be privy to certain rights such as voting rights. The more stocks you hold, the larger your ownership portion is, and the more your voice is heard. Some stockholders may also receive dividends (payments from the company), however, the rights of each type of stock is predetermined by the company, and should profits dip during a period of time, these dividends may not be paid out to stockholders.
For clarification purposes, take the following example. You and your friend agree to open up a cafe. You each put in an equal amount of money to get the business started. Your half-ownership of this business works in the same way as you purchasing a stock in return for part ownership. As a part owner of this cafe, you get to be a part of the decision making and also share in the profits of the business.
However, we must also note that not all stocks provide voting rights, allow decision making and pay out dividends. There are different types of stocks and each type of stock comes with its own stipulations.
A very large company that is listed on a stock exchange functions slightly differently than the example mentioned earlier. For example, Company XYZ decides to list shares for 50% of the company on the stock exchange into 50 shares. If you purchase one of these shares, you would own 1% of Company XYZ. For the owner of the company to maintain control (through having a majority of the shares), they must make sure to hold more shares than what they list on the stock exchange.
Cryptocurrencies are a kind of digital asset that works on the Blockchain system. This means it functions without an intermediary, or in other words, it is a decentralized system. When you invest in cryptocurrency, you are buying ‘coins’ and you become the owner of this coin. The difference here with stocks is that these coins do not represent ownership. You would not gain voting rights or be a part of decision making in the company (although some companies do allow these rights with those holding a very large amount of their coins).
The main income that can be made from cryptocurrency is from its fluctuating rate, or value due to speculation and demand of other investors in the market. The value also depends on the use cases of each cryptocurrency. For example, the XRP coin is a token from a company called Ripple. Ripple created the XRP coin as a means of reducing issues with intermediaries when it comes to international financial transactions. It also increases the speed of transactions and reduces transaction costs. This is why many investors have an interest in this particular coin.
Crypto is seen as the future of currency. It can be used for payments and trades in a way that is fast and efficient. In fact, this is already happening today.
When it comes to buying and selling cryptocurrencies and stocks, the two work differently in certain ways. Cryptocurrencies can be traded 24/7, with no days off. However with stocks, there are opening and closing times for the market. The stock market also closes over weekends and holidays.
The ability to make an income from cryptocurrencies and stocks do have some similarities. For instance, one of the main ways to make a profit in both of these assets is the difference in price when you buy and sell the asset.
For example, if you purchased the 100 ADA coins at the beginning of 2021 for $0.3 per coin, you would have spent $30. Then if you had sold all 100 of your ADA today at the price of $1.80 per coin, you would receive $180, and have made a profit of $150. However, you may not actually receive the full $150, because we also have to take into account the transaction and withdrawal fees.
Both cryptocurrencies and stocks work in the same way as the example given.
However, there are also differences between the two assets when it comes to making a profit. One of these differences is in cryptocurrency mining. Mining is guessing a series of numbers to solve mathematical equations successfully in order to verify information on the blockchain. This process is computer generated and requires a level of processing power (depending on how much you are mining). If you guess correctly first, you will be eligible to receive the coins.
Crypto also has a scheme called Proof of Stake, where you lock your coins (you cannot use or trade these coins) for a specified period of time. In return you receive interest on these coins. However, this interest will depend on the value of these coins on each day (which can fluctuate). If the value is low on a certain day then the interest received from that day will be low, and if it is high on another day then the interest received on this day will be high. On the down side, when you lock your coins, you will not be able to sell them if they are high during the locked period. Another scheme available only on the Binance platform is Flexible Saving. With this, you can deposit your coins with Binance and get interest back in return. This works similarly to opening a savings account with a bank.
Another difference is that stocks can sometimes pay out dividends to its stockholders depending on the profitability of the underlying company at that time. However if the company is unprofitable, the stockholder may not receive dividends. If you are interested in receiving dividends, it is therefore important that you do your own research on the company and believe in its ability to grow in profits. In addition to this, it is also important to make sure that the stock you are purchasing does in fact provide stockholders with dividends. Remember, not all stocks pay out dividends, and even the ones that do will not guarantee dividends as this payment will depend on the company’s profitability and strategy at the time.
Cryptocurrencies are a riskier investment than stocks. This is due to cryptocurrency being highly volatile and will fluctuate daily. The lack of intermediaries in this market also adds to its volatility as there is no institution that has some level of control over the prices of these assets. For example, when the GALA coin launched, it was priced at $0.021 per coin, but in just 24 hours the value grew to $0.077, which is a 270% growth. These huge fluctuations both increasing and decreasing is not uncommon in the cryptocurrency world.
It is important to get some background on the token you are interested in investing as well. Make sure you learn about the company behind the token by finding out about the company’s partnerships and projects to be more confident that you are making a sound investment.
Stocks are not as risky as cryptocurrency investments since their prices are monitored by the stock exchange. Any company that wished to have an IPO (the first release of shares on a stock exchange) must also undergo a vigorous process of verifications and meet certain standardized requirements in order to be eligible. This makes sure that companies on the stock exchange have a level of transparency and trustworthiness.
You may have heard the term “high risk, high reward” before, and this is definitely true for cryptocurrencies. The payoff with crypto is much faster and higher than with stocks, but it is not without high risk. This is something to take into consideration when deciding which asset would be best suited for you.
The system for cryptocurrencies and stocks function differently, and the availability of information varies as well between the two.
As you may know, cryptocurrencies work on the blockchain system. This is considered by many to be the system of the future. It functions through its decentralized nature, where there is no single owner of the system. This is used in Decentralized Finance, also known as DeFi, an up and coming financial system where financial transactions do not require an intermediary (such as a bank or a fund), but rather information is verified through the mining process mentioned previously. Information on the blockchain goes through multiple verifications and is almost impossible to hack, making it a secure and transparent network. Take Solana for example, which has an Open Source infrastructure. This means anyone can use Solana’s source for their transactions or application developments without any barriers.
Stocks on the other hand, function on a Centralized system because every stock is regulated on the stock exchange. The stock exchange also oversees all financial transactions and keeps records on information about each company that is listed. The information on companies include checking that each company maintains a level of transparency with the public through releasing its financial statements. Note that the stock market also works under another intermediary which is the bank.
Both cryptocurrencies and stocks come with a level of transparency, with crypto it is through information on the blockchain, and with stocks it is through the mandatory release of financial statements of the underlying company to the public. With regards to their systems, crypto works through decentralized finance while stocks are through centralized finance.
In terms of investment, cryptocurrencies have a very low minimum, making it easy for anyone, even those with a lower budget for investing, to get started. For example, Bitcoin can cost up to $56,000 per coin at times ($56,000 is the value of Bitcoin at 19/11/2021). However, if you want to hold Bitcoin in your portfolio, you don’t have to purchase 1 Bitcoin, you can choose to spend $10 and purchase 0.0002 BTC instead.
When it comes to stocks, many exchanges will claim that there is no minimum amount required, but in reality you will still need to have a minimum of $500-1,000 at hand since in this system the broker will charge a commission and there are also higher fees set by the exchange (such as NASDAQ). For example, if you want to invest in purchasing shares of Company XYZ, whose shares are currently valued at $100 per share, your broker may charge you an additional $6.99 in commissions making your total spending $106.99. But actually, brokers should not charge more than 1% in commissions. However, if the broker commissions are $6.99 and you buy $500 worth of shares, the commission will make up 1.4% of your investment, or if you buy $1,000 worth of shares, the broker’s commissions will make up 0.7% of your investment. This means that there are a certain amount of shares that should be bought in order for the broker’s commision to fall below 1%, which can make the minimum requirement for your investment much higher than it would be for cryptocurrency.
To answer this question, you must first figure out the kind of investor you want to be.
If you are a risk taker, and you have time throughout the day, you might be suited to day trading with cryptocurrency. This has the potential to grow your portfolio very quickly. If you are interested in growing your investment long term, you might be more suited to cryptocurrency if you are willing to take on more risk, or stocks if you are more risk averse (keep in mind though, that even stocks can be high risk, even if the risk is not as high as with crypto). With long term investments you will not need to regularly check up on the value of your investment, but you may want to do more research on the underlying companies of these assets and choose your crypto and stocks based on the company’s strategies and the markets / industries they are in.
If your budget is small, you may want to begin with cryptocurrency for its low barriers to entry and its lower fees. You can also hold off on investing for now and save up enough to enter the stock market.
If you are interested in receiving passive income, you may choose to invest in cryptocurrency and stake your coins in order to receive income on its interest. But if you don’t want to take on as much risk, you can choose to invest in stocks that provide dividends instead.
Investments in cryptocurrencies and stocks both come with their risks. Before making any investments, it is wise to do your due diligence on the market and the companies of the assets you are interested in.
If you are new to investing, you must first figure out the kind of investor you are. How much risk are you willing to take? What is your budget? Do you have a preferred system that you feel you can trust more? How much time do you have to spare on investment activities? How would you like to make money? These are some of the questions you should ask yourself first, and using this article as a guide, you can figure out for yourself what your next step should be.
A strategy you can use to be more secure with your investing is to make sure your portfolio is diversified. You could put some of your money in stocks and the rest in crypto. Remember also that you are not only limited to stocks and crypto. You can even put some of your investments in gold, real estate, or funds.
At the end of the day, what you should invest in is very personal and varies from individual to individual. Choose something that suits your life, your personality, and what you are interested in.