Cryptocurrency Vs. Stocks
Cryptocurrencies are digital currencies that have no physical form. They are not backed by anything tangible like gold or silver. Stocks are shares of companies that are traded on stock exchanges. These stocks are usually issued by large corporations.
From Elon Musk to El Salvador, cryptocurrency has been causing quite a stir. While Bitcoin may be generating much of the conversation regarding the financial possibilities of cryptocurrency, a variety of other cryptocurrency options are entering the market as financial and investment instruments.
For those looking to diversify their portfolio or who just want to take advantage of this opportunity, it may seem like a great time to invest.
But does cryptocurrency stand up to the hype and is it a better investment than investing in the stock market? The following considerations may help you decide whether cryptocurrency or stocks are a better investment.
Volatility
Bitcoin, which currently dominates half of the cryptocurrency market, has seen a dramatic rise since its initial offering in 2009, rising in value to $68,990 by the end of 2021.
At the same time, bitcoin is considered an extremely volatile currency that has lost 30% of its value in one day. One of the challenges with cryptocurrencies like bitcoin is that they have no intrinsic value as they are not backed by any assets, such as minerals or cash, nor are they recognized as an official currency by any national banks, with the exception of El Salvador.
Because of this lack of intrinsic worth, they are subject to unpredictable, volatile price swings; depending on when you buy into the cryptocurrency market and if you sell off your holdings, you could make or lose a lot of money.
The stock market is not independent of volatility, either. For example, stocks dropped roughly 30% in March of 2020 due to the COVID-19 pandemic and concerns over economic effects and public health fallout.
The stock market has since rebounded, though it is still subject to daily volatility relative to individual stocks. Over time, the stock market has steadily increased in value, which is why stocks remain a go-to investment option.
More importantly, stocks are part-ownership contracts and investments in a company, which provide tangible value based on a company’s performance.
Unlike bitcoin or other cryptocurrencies which are speculative investments based on the potential use as future currency in large-scale transactions, owning stocks offers some guarantees, as long as a company continues to exist, that that stock is valued by other investors.
Diversity
There are over 18,000 different cryptocurrencies, with popular alternatives to Bitcoin being Ethereum, dogecoin, and Monero. These cryptocurrencies have different values influenced by their market capitalization and their popularity, with Bitcoin currently being the most highly valued currency.
Today, there are roughly 6,000 different companies that trade on the New York Stock Exchange and the Nasdaq; international stock exchanges, such as the Shanghai Exchange or London Stock Exchange, offer access to additional companies.
Similar to cryptocurrencies, stocks come in a variety of different classes and valuations, though economic factors such as interest rates and inflation have a greater influence on stock values than popularity and speculation.
Security
On the one hand, cryptocurrency offers a vastly improved level of digital commercial activity dependent on the blockchain authorization process.
With no centralized network to store the digital transactions, each member of the blockchain offers a certain level of security relative to the entire network such that the entire network can’t be compromised.
Likewise, account and password authentication adds an additional level of security relative to accessing accounts and purchasing currency. At the same time, cryptocurrency has not been immune to hackers and, in the event that cryptocurrency is stolen, there is no way to compensate for the loss since it doesn’t provide any tangible alternative.
Most importantly, because it is not a regulated currency, a variety of scam cryptocurrencies exist, in addition to phishing attempts that can solicit private information relative to cryptocurrency purchases.
A certain level of due diligence and cybersecurity, such as a sufficient digital wallet, is necessary to secure one’s cryptocurrency purchases.
Stocks offer much greater security relative to cryptocurrency. Stocks are regulated by the Securities and Exchange Commission with a variety of laws and regulations intended to limit speculative and illegal trading.
These regulations don’t limit the inherent volatility of stocks relative to market pressures but do substantially reduce investments in poorly-financed companies.
Stocks do require a certain level of transparency relative to investing through a brokerage, while cryptocurrency accounts allow private investors to purchase and trade their currency independently.
Short-term value: stocks vs. cryptocurrency
Because cryptocurrency experiences such unpredictable volatility with so many unproven currencies constantly entering the market, stocks offer much greater predictability for investors interested in short-term trading (holding stocks for less than a year).
While there will always be certain volatility, expenses, short-term trading based on economic volatility, inflation, interest rates, and worldwide spending patterns offer much greater predictability, particularly when paired with company performance.
For those looking to trade regularly on a short-term basis, stocks have the potential to earn more consistent returns.
Long-term Value
The future is uncertain, which is why cryptocurrency continues to generate appeal. With greater investment in cryptocurrencies, investors hope that banks and companies will continue to recognize its legitimacy and adopt cryptocurrency as a legal tender.
Because of its future potential and the value that various currencies, such as Bitcoin and Ethereum, have achieved to date, there is still considerable investment potential with regard to cryptocurrencies.
At the same time, stocks continue to offer certain advantages. First, established companies provide dividends relative to shares purchased, which adds an additional income stream without having to sell stocks.
Second, the stock market continues to increase in value, with different funds, such as index funds, providing greater long-term gains than short-term or speculative trading.
While stocks don’t have the potential to realize the same gains as cryptocurrencies relative to their introduction, they still have the potential to achieve considerable gains over a long-term period.
When it comes to investing, the adage to not put all one’s eggs in one’s basket remains relevant. Investing entirely in cryptocurrency would be an unwise choice given that it remains a speculative investment option with a considerable possibility to experience substantial losses.
However, cryptocurrency does possess market value relative to investor enthusiasm, which, though irrational, can considerably influence the value of various investment instruments.
For those deciding between cryptocurrency and stocks, pursuing a balanced and conservative strategy may help to satisfy the desire for either investment option.
