Since its inception in 1602 by the Dutch East India Co, stocks have been a popular investment vehicle. However, a new type of investment has emerged in the last decade – cryptocurrencies – that seeks to challenge existing financial channels. Though less than 5% of people globally currently hold cryptos, it is quickly gaining traction among retail and institutional investors alike. In June 2021, El Salvador became the first country to make Bitcoin legal tender, with several other countries likely following suit in the upcoming year.
With the introduction of cryptocurrencies, investor interest has shifted away from the stock market towards the crypto market. Currently, 58% of crypto users are under age 34, while 82% have bachelor’s degrees or higher. As global crypto adoption climbs, the debate on the top investment choice remains – cryptocurrencies or stocks?
Key Takeaways
- Both stocks and cryptocurrencies are high-risk, high-reward assets that can be incorporated into your investment portfolio and get used to build wealth.
- Whereas the stock market is highly regulated and centralized, the crypto market is unregulated and decentralized.
- Notable differences between stocks and cryptocurrencies are their (1) unique selling propositions, (2) profit potential, (3) volatility and risk, (4) ease of use and transaction fees, (5) public offerings, and (6) legalities.
Intro to Stocks and Cryptocurrencies
Stocks and cryptocurrencies are high-risk, high-performance assets that have allowed millions to gain newfound financial freedom with their various innovations over the years. They can get accessed through many different online platforms, such as brokerage accounts, digital exchanges, and mobile apps, which has enabled unprecedented retail access to investment opportunities on a global scale. As a new investor, you may be asking yourself which is better suited for your portfolio. While they may look and act alike when you place buy and sell orders, some underlying similarities and differences should get addressed.
Stock Market
The stock market is a collection of markets and exchanges around the world where investors can buy and sell shares of publicly traded companies, such as Tesla, Costco, Visa, and Apple. In the U.S., most trading takes place either on the NASDAQ (National Association of Securities Dealers Automated Quotations) or NYSE (New York Stock Exchange). Traders and investors buy and sell stocks to profit using various strategies, such as day trading, buying the dip, buy-and-hold, and scalping.
Stocks, or equity, represent partial ownership in one or more companies. Investors can profit either by receiving recurring dividends or selling the stocks at higher prices. Unlike cryptos, stocks are heavily regulated. If anything goes haywire, the government will step in.
Cryptocurrency Market
Bitcoin was the first cryptocurrency to make its debut in 2009 under pseudonymous founder, Satoshi Nakamoto. It is a digital asset that can be stored and traded through decentralized networks using blockchain technology. Since its inception, the value of Bitcoin has grown more than 10M%! In comparison, the average annual return of the S&P 500 in the past ten years is roughly 13.6%, according to Goldman Sachs data.
Aside from the exponential returns, traders and investors get drawn to this alternative asset for several reasons. Because cryptos do not have a central authority and govern by consensus through peer-to-peer (P2P) technology, payments can get made anonymously with no third parties involved. They are highly secure and difficult to hack (though not impossible), which makes it easy for cross-border transactions.
Because of its independent and decentralized nature, anyone with access to hardware systems can become a miner or create their altcoins. For example, meme coins such as Dogecoin and Shiba Inu got created by bored programmers as a joke. That is very different from the stock market, which abides by rules set by government agencies such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Stocks vs Cryptocurrencies – Key Differences
Stocks and cryptos carry distinct functionalities that may make them more attractive than the other to different traders and investors.
1. Unique Selling Propositions (USPs)
At a high level. stocks represent an ownership right. When you purchase shares of company stock, you become a shareholder investing in the company and thus are entitled to a portion of its profits. As a shareholder, you make money if the company profits and lose money if the company takes a loss.
Stocks act as a store of value. You cannot use stocks as a form of payment for goods and services, though you can liquidate your positions to get access to fiat currencies or leverage existing positions using margin instead. If you are a new investor, the easiest way to buy and sell stocks is by opening an online brokerage account through a brokerage firm such as Webull, Fidelity, Charles Schwab, or Vanguard.
On the other hand, cryptos are digital currencies that can get used as both a medium of exchange and a store of value. When you buy cryptos, such as Bitcoin and Ethereum, you get allocated tokens or digital coins. But, note that they do not represent a legal stake in the organizations that issue them. By investing in crypto, you are investing in technology, not a company or organization issuing stock.
Similar to commodities such as gold and silver, cryptocurrencies are speculative assets. They derive value from community adoption, network effects, and scarcity. However, because crypto is secured and managed through cryptography, you have complete control of your funds if you can access your private keys. You can purchase crypto using a cryptocurrency wallet, or digital wallet. You can use crypto exchanges such as Coinbase and Coinbase Pro, lending platforms such as Celsius and Gemini, or through cold storage, such as Ledger Nano X or Trezor Model T.
2. Profitability and Time Invested
Investing in stocks requires a lot of patience and time. For most investors, the only way to earn significant returns is through holding positions for years or decades. On the contrary, cryptocurrencies have historically yielded exponential returns in a short period compared to stocks. For example, Solana was worth roughly $25 in July 2021. Fast forward a few months later, its value more than quadrupled!
Comparatively, the returns from the crypto market far outpace the stock market. Thus, while both assets require taking similar levels of risks (depending on what stocks you purchase), buying cryptos allows you to pick faster horses for higher returns.
Receiving Dividends vs. Crypto Lending
Another notable difference is how you can earn passive income. Established companies in the stock market, such as Apple, J.P. Morgan, and Target, pay regular dividends to shareholders. In the crypto market, the concept of dividends exists — but not in its traditional form and it comes with more risk.
3. Volatility & Risk
Cryptocurrencies are much more volatile and risky than stocks due to their rapid price fluctuations. As fast as cryptos can rise, they can fall just as quickly. As a result of the volatile behavior of the crypto market, many investors are hesitant to invest in it.
Though stocks are considered the safer investment between the two, if you have a relatively high risk tolerance and a solid investment strategy, the volatility of crypto may not matter as much to you (particularly given how cryptos have been trending in the same direction as tech stocks recently). Similar to how we have blue-chip stocks, the same applies to crypto. Bitcoin is often touted as digital gold by supporters, while Ethereum is a close second.
From a profitability standpoint, cryptos yield much higher return potentials and are a high-risk, high-reward medium. If we are looking at risk, stocks are less risky overall and are a medium-risk, medium-return asset.
4. Ease of Use & Transaction Fees
The timeframes when these securities can get traded, and their associated transaction fees are important factors to consider.
Trading Hours
The stock market is only open during business days and set hours. In the U.S., the stock market opens from 9:30 AM to 4:00 PM ET Mondays to Fridays. However, some brokerages, such as Webull, allow pre-market and after-hours trading from 4:00 AM to 8:00 PM ET. That means investors and traders will not be able to trade outside of these hours. Additionally, the exchanges are closed during certain holidays.
Cryptocurrency exchanges stay open 24/7, so investors and traders can trade non-stop if they want. However, this can lead to a constant state of FOMO (fear of missing out). For example, I always have crypto charts open on my laptop to check prices (which is not necessarily a good thing).
Transaction Fees
Most brokerage firms these days offer zero-commission trading, meaning you do not have to pay any upfront fees when buying and selling stocks. However, certain investments, such as options, index funds, exchange-traded funds (ETFs), and mutual funds may have a small expense ratio.
On the other hand, buying and selling crypto or withdrawing funds from crypto wallets can incur high transaction and gas fees depending on demand. Whenever I buy crypto on Coinbase Pro, for example, I typically get charged anywhere from ~$1-5 depending on traffic at the time for the specific coin and how much I buy. Additionally, all transactions are non-reversible and publicly available. That means if you make a mistake, you may not be able to recover your crypto.
5. IPO’s vs. ICO’s
When a private company’s leadership wants to take their company public, they can go through an initial public offering (IPO) to list its shares on a stock market. Another popular option is to go public through a special purpose acquisition company (SPAC), a black check company created to raise capital. Typically, the company has two purposes for going through an IPO. It allows them to raise capital for expansion purposes without having to get loans. Additionally, it provides early investors and internal employees an opportunity to profit by selling their company shares.
Unlike the stock market, any organization or individual can issue crypto. Companies that want to develop crypto projects can raise capital by offering an initial coin offering (ICO) to the public. For example, in June 2021, Solana Labs raised over $300M from investors, including Andreessen Horowitz and Polychain Capital.
6. Legalities
Stocks and cryptocurrencies are both legal. However, the stock market is more established and centralized, making it less likely for fraudulent activity. Comparatively, digital assets like SCAM and Garlicoin are more prone to pump-and-dump schemes and fraudulent activity due to their decentralized nature.
Whereas public companies are required to publish reports on their operations and finances, cryptocurrency projects are not required to provide financial statements or forecasts. With thousands of altcoins available to the public, the lack of regulation and transparency can make it very difficult to analyze the value of various digital assets.
As mentioned earlier, shareholders have legal rights to a part of company profits, such as dividends. Though crypto investors have full ownership of their digital currency, they do not have legal rights. If a crypto project gets hacked, the investors are not entitled to get their funds back (Think: Dao hack).
Which One Should I Invest In?
Before investing in stocks or cryptocurrencies, consider your risk appetite, available funds, investment goals, and financial knowledge.
The Argument for Stocks
Having your money in a savings account is not ideal as inflation often far outpaces the interest you earn. By putting your money to work in the stock market, you can grow your money faster and achieve high returns. Though the stock market has its risks, you can expect an average 10% annual return if you stay consistent and invest wisely over time.
Buying stocks also allow you to invest in companies that you like. For example, if you regularly use Apple products, you can invest in the company by buying their stock. If you are bullish on electric vehicles, you can invest in EV companies, such as Tesla, Lucid Motors, Nio, or Xpeng.
The Argument for Cryptocurrencies
While crypto has a reputation for being a high-risk investment, we believe crypto has a place even in conservative portfolios. Over the years, the world of cryptocurrency has often gotten associated with illicit activities and scams. However, crypto has several legitimate use cases, such as providing access to personal finance for the unbanked, distributing computing, and paying for goods and services.
One of the nice things about crypto is that it is generally not correlated with bonds, stocks, or commodities, so it can get used to diversify your portfolio in times of uncertainty. As governments continue to print money, inflation concerns continue to pose a problem for recovery.
Of course, you can also invest in both assets. Currently, I invest in the stock and crypto markets, though my stock investments are significantly higher as a proportion of my portfolio compared to crypto.
Bottom Line
While both the stock and crypto markets carry risks, the key is to take calculated risks. That means managing your risks appropriately and doing your homework before making any investment decisions. As investors in cryptos and stocks ourselves, we believe that digital currencies are the future, but stocks are a crucial part of any diversified portfolio.
