Four Differences Between Cryptocurrencies & Stocks
Cryptocurrency is gaining a lot of attention nowadays, thanks to digital coins such as Bitcoin and Ethereum, which have had quite a journey since their boom in 2017. With the several traditional storage options becoming more outdated, people are now looking for other ways to spice up their investment portfolios, and cryptocurrency has proven to be a more democratic way to do this. However, much of the optimism comes from the cynicism towards institutions and traditional financial instruments such as stocks and bonds.
Cryptocurrency and stocks share several similarities, making them easily interchangeable. However, these two assets are different, so you can’t expect to get the same results from both of them. Knowing and understanding how they work and how they differ is important before you jump into investing and trading using cryptocurrency platforms for beginners.
Let’s take a look at some of the main differences between cryptocurrencies and stocks.
Crypto Isn’t as Tightly Managed as Stocks
Nowadays, almost anyone can launch a cryptocurrency. At the time of writing, there are already a total of 6000 cryptocurrencies present in the market. However, this is not the case with stocks. Before you can put up stocks of your company for sale, it has to be reviewed and audited by the appropriate government agency. Also, your business must strictly follow different rules and regulations before being presented to the public.
Another big difference between cryptocurrencies and stocks is the different functions they serve. The primary goal of stocks is to increase the funds available to a company. Crypto serves different purposes: some coins must be used for apps to run on the proprietary blockchain; other cryptos can be used on specific websites, and some tokens are developed to imitate the movements of a specific asset to provide stability and liquidity.
Unlike stocks, cryptocurrencies are entirely based on code. So before you start purchasing even small amounts of crypto, you must understand its purpose, as it might take you to utilities beyond a mere investment.
Cryptos Fluctuate More
One thing that you should know about cryptocurrencies is that several of them exclusively follow supply and demand, such as Bitcoin. The motion of digital coins is not dependent on factors such as market trends, expansion plans, profits, or financial statements. Cryptocurrency is the most speculative asset in the market, and its value is based on its reputation with the public.
For example, the most popular type of cryptocurrency is Bitcoin, which has several layers. With that, the amount it takes for transactions is slower compared to other currencies or debit and credit cards. Also, it has extremely high charges to the point that it’s unusable for day-to-day purchases.
Several factors would greatly affect any asset negatively, but this does not apply to Bitcoin because of the people that invested and believe in it. It is recommended that you take into consideration the caution and risks before diving into Bitcoin. People highlighted that Bitcoin’s limited supply made it valuable over the years, but everything depends on the demand for it. There’s no effective way to check if there will be demand for Bitcoin in the next 5-15 years. Crypto analysts find it difficult to make predictions for a year, let alone account for a decade ahead of time.
Cryptocurrency is constantly fluctuating; there will be times when the value is up, and other times, it goes down. So, if you prefer stability, stocks are the best option. Even though you may not entirely receive what you can earn if you invest in Bitcoin, you can craft a well-balanced portfolio where you can beat inflation every year and earn a little profit from dividends. This is something you can’t get with crypto.
Crypto Is Not as Easy as Stocks to Get into
There’s no denying that most investors and traders view crypto as an asset for the people. However, cryptocurrencies are not as easy to trade as people think.
First, investors can’t just go online and expect to directly trade fiat for crypto funds. To do that, investors need to first get a crypto wallet for storage and then create and verify a crypto exchange account to start trading cryptocurrency. Not to mention, some exchanges only allow trading from one cryptocurrency for other cryptocurrencies.
With stocks, it’s easier to invest. Thanks to your bank’s brokerage service, you can start investing without having to go through the difficult processes that you’d have to deal with if you invest in crypto. Also, with stocks, you’ll have applications that allow you to quickly trade without the need to pay commissions.
Cryptos Provide Fewer Security Options than Stocks
Since cryptocurrency is less regulated, it’s obvious that it’s less safe. While there have been little to no cases of hacking in major cryptocurrencies, it has been the case with some trading platforms.
For example, you probably haven’t heard of the single best cryptocurrency platform in Canada, Quadriga – the owner of Quadriga mysteriously died in India. It was then revealed that the wallet which contained all the cryptocurrencies on the platform was lost, and it contained $180 million worth of assets.
The issue with cryptocurrency is when you lose something, there’s no way to get it back. In this case, $180 million worth of cryptocurrency were lost forever.
On the other hand, stocks go through extremely careful evaluations before hitting the market. A stock investor needs to follow the heavy regulations, making it nearly impossible for stocks to be forged or hacked from the beginning.
With cryptocurrencies, anyone can start an initial coin offering, increase their profits, then disappear. You could say crypto’s decentralisation is a double-edged sword: it allows for great privacy and autonomy, but at the same it makes things more dangerous and uncertain. Because there is no authority handling or managing crypto, there is no one to guarantee its safety either.
With stocks, as soon as you purchase company shares, they will be assigned to your name, along with documented evidence of ownership. Because of stock’s security of tracking, record-keeping, and anonymity, it’s difficult and nearly impossible for hackers to steal your assets.
You should know how to trade and keep your cryptocurrency in a safe manner. To do that, you need to ensure to not leave your assets, regardless of their value, on an exchange. By leaving your coins, you are basically handing the ownership of your cryptocurrency over to the exchange, which is very risky. Most of the time, cryptocurrency hacks happen through exchanges, so it’s important that you find a way to store the coins yourself.
Note that this method applies if you’re using a custodial exchange like Coinbase or Binance. But if you’re buying crypto CFDs via brokers like eToro or Immediate Edge, you don’t need a crypto wallet. Instead, you should be able to withdraw your profits in any currency (including fiat) via credit and debit cards, or other third-party payment methods.
With that being said, you must do your research on cryptocurrency and the different types of wallets available. There are various types with different purposes: there are those that can be used on devices, and also types that look like a USB key. For big-budget investors, it’s usually recommended to use a hardware-based wallet to ensure your digital coins are as safe as possible. Hardware wallets can be disconnected from the network, so it’s difficult for hackers to access and rob them directly.
One great advantage of cryptocurrencies is the great return on investment they can provide. You will be hard-pressed to find an asset that will give you the type of returns that early Bitcoin investors experienced. Diving into the right ICO and playing your cards right can definitely result in a huge profit over a relatively short period.
However, if you’re new and don’t have the proper knowledge of investing and trading cryptocurrencies, it’s wise to do your research, learn the basics, and know how to handle the ups and downs of cryptocurrency.