Cryptocurrency is making a lot of noise right now with coins like Bitcoin and Ethereum having their best days since the boom of 2017. People are looking for a store of value outside the traditional options and cryptocurrency seems like a more democratic way to invest. However, a lot of the optimism comes from cynicism towards institutions and traditional financial instruments like stocks and bonds.
While both crypto and stocks share some similarities, they are also vastly different, so you can’t expect to get the same from both. It’s also very important that you know these differences before you jump into cryptocurrency trading. They may have disadvantages compared with stocks that you may not have considered. Stocks might also be the best option for what you’re trying to accomplish. Let’s take a look at some of the major differences between cryptocurrencies and stocks.
Cryptocurrencies Aren’t as Tightly Regulated as Stocks
Literally anyone can start a cryptocurrency these days. At the time of writing, there were a total of 4000 cryptocurrencies in circulation. One of the most popular cryptocurrencies, Dogecoin, was even started as a joke.
This is not the case with stocks, especially those listed in the Dow, NASDAQ, and the New York Stock Exchange. Before a stock can be created, it has to be looked over by the proper government agency and audited. It also has to abide by a variety of different regulations before it can even go public.
Another difference between stocks and cryptocurrencies is that they serve different functions. The main goal of stock is to raise funds for a certain company. Crypto, on the other hand, can serve many purposes. Some cryptocurrencies might be used to run apps on a proprietary blockchain. Others might exist to be used on specific websites. Others might be there to mimic movements of a particular asset to provide more liquidity and stability.
Cryptocurrencies are made entirely from code and are really nothing like stocks. So, before you decide to buy cryptocurrency, you have to know exactly what its purpose is. It might be more than just an investment.
Cryptocurrencies Are Much More Volatile
While we can see some volatility in the stock market, it’s nothing like what you see in the crypto space. The worst part is that price movements seem to often come out of nowhere and require a lot of analysis to decipher. With a stock, it’s usually much easier to pinpoint why it’s behaving the way it is.
The thing with cryptocurrencies is that many of them are solely subject to the laws of supply and demand, like Bitcoin. The movements are not reflective of things such as financial statements, industry trends, expansion plans, or earnings. Cryptocurrency has to be the most speculative asset there is and a lot of a cryptocurrency’s value is derived from its reputation with the public.
For instance, Bitcoin is the most popular cryptocurrency by far, even if it has many recognised flaws. Transaction times are much slower than with fiat currencies or credit cards. It also has extremely high fees that make it unusable for day-to-day purchases.
These are all things that would’ve negatively affected any asset, but not Bitcoin. That’s because a lot of people have an invested belief in it. As Mark Cuban said, Bitcoin is little more than an idea at the moment. This is also why he suggested that people only invest 10% max of their net worth in cryptocurrency.
Also, we recommend that you err on the side of caution before looking at Bitcoin as a store of value. People like to point to the fact that its limited supply will automatically make it more valuable over time, but it’s all dependent on whether there will be demand for it. There’s no way to know where the demand for Bitcoin will be 5, 10, or 15 years from now. Analysts can barely make predictions for the next year when it comes to crypto, let alone a decade.
If your goal is stability, then stocks are hands down the best option. While you may not get the same returns as Bitcoin in the short run, you can invest in a well-balanced portfolio that will allow you to beat inflation every year and make a little bit of money from dividends – something you can’t get with crypto.
Stocks Are Easier to Get Into
Yes, you heard that correctly. While most people see crypto as an asset for the masses, they’re not as easy to trade as many people think. For one, you can’t just hop online and expect to be able to trade fiat for cryptocurrency. You will first need to get a wallet, then get verified by any exchange you want to trade cryptocurrency on. Not only that, but some will only allow you to trade cryptocurrencies for other cryptocurrencies.
Investing in stocks, however, is simpler than ever. You probably have a brokerage service at your bank that will allow you to start investing fast without having to go through all the holes you’d have to with crypto. You also have apps that allow you to trade stocks without having to pay commissions.
While most of these used to be reserved for US clients, many are now catering to Canadians as well. If you’re living in Canada, we suggest you check out this piece by Wealthsimple on how to invest in stocks in Canada. It will show you the exact steps needed to start trading stocks even if you’ve never invested in the stock market before. They also have a few tips for beginners, and also give valuable advice on what you should be looking for in a stock.
Stocks Are Generally a Safer Option
The fact that cryptocurrency is less regulated also means that it’s less safe. While no major crypto has even been “hacked”, it has been the case with many exchanges. You even have strange stories like that of QuadrigaCX, which was the single best cryptocurrency exchange in Canada. The owner of the exchange died in mysterious (and some would even say suspicious) circumstances in India. The thing is that the wallet that contained all the cryptocurrencies on the exchange was lost, which meant that $180m worth of assets were lost forever. You also have coins and projects whose sole goal is to defraud investors, like in the infamous Bitconnect case, for instance.
Stocks, on the other hand, have to go through extensive scrutiny before they hit the market. The heavy regulation that they have to abide by means that it’s almost impossible for a stock to be fraudulent from the get-go.
With cryptocurrencies, anyone can launch an ICO, raise money, then vanish into the night. What makes cryptocurrencies so interesting, such as its decentralized nature and privacy, is what makes them dangerous as well. No one controlling a cryptocurrency means that no central agency can regulate that cryptocurrency either.
When you buy a stock, your name is assigned to it, and there is documented evidence of ownership. Because of how they’re tracked and the record-keeping involved, it’s not really possible for someone to steal stocks from you. With cryptocurrency, it’s still possible for your coins to be stolen and there will be nothing you’ll be able to do about it due to the anonymity.
This is why you must know how to trade and store cryptocurrency safely. First of all, you have to make sure that you never leave your coins on an exchange. When doing so, you are basically handing over ownership of your cryptocurrency to them. When cryptocurrency is stolen, it’s usually through exchanges, so you have to find a way to store the coins yourself.
This means that you will have to do your research on cryptocurrency wallets. You have wallets that can be used on devices and others that look like a USB key. It is usually recommended that you use a hardware-based wallet if you want your cryptocurrency to be as safe as possible. Since they can be disconnected from the network, there is no way for someone to hack them directly.
Crypto Offers the Highest Risk, but Higher Rewards as Well
You’ll have a hard time finding any asset that will give you the type of returns that early Bitcoin adopters had. This is one of the perks of crypto. If you jump on the right ICO, you could make handsome profits overnight. This is the trade-off for the high risk and volatility of the market.
However, before you go ICO hunting, you will need to learn the basics of cryptocurrency and how to read a whitepaper. You also have to gauge sentiment in the community, especially about the truthfulness and track record of the creators of the coin.
As you can see, stocks and cryptocurrency are vastly different. This is why you will need to do your research on them if you’re more used to traditional assets. We would also suggest crypto investors reconsider some of the myths and misconceptions they may have about stocks and see what they have to offer.