An In-Depth Guide to Crypto vs Stocks: Knowledge Is Power
Do you want to invest in your future? Studies show that out of 26% of Americans who started investing in 2020, 35% of them got into investments to plan for the future. If you want to start investing, you may be wondering if you should choose crypto or stocks.
The age-old battle of crypto vs. stocks has been raging for over a decade. The fact is that both have pros and risks to consider. Crypto can feel intimidating and too unstable for new investors.
On the flip side, stocks can feel too safe. The absolute truth lies in the middle, with a diversified approach being the best. Keep reading to learn everything you need to know about investing in crypto or stocks.
What is Crypto?
Before you get into crypto investing, it’s a good idea to know more about what Crypto is. People thought it would be the next big financial tool when it was first popularized. The idea of a 100% decentralized currency, impervious to inflation or corruption, was appealing.
Over a decade later, many of these early hopes have been only half realized. Crypto is huge and worth billions of dollars, but its future as a truly digital currency is still in doubt. These days, crypto coins are better understood as investment assets instead.
The Nature of Crypto
The likelihood of buying a cup of coffee with Bitcoin seems to be some ways away. Part of this had to do with the nature of crypto itself.
Because cryptocurrency is a limited commodity, it isn’t possible to “print” more of it. Bitcoin, for example, has a hard cap of 21 million coins. Like all cryptocurrencies, the process to “mine” Bitcoin is long and expensive.
Entire farms of crypto-mining computers run day and night, performing complex mathematical equations. People mine crypto through code cracking, which still takes ages, even with the fastest machines. The combined effort required and the limited supply of total coins are the main problems.
The nature of crypto makes it scarce and in high demand, making it expensive. Bitcoin ranges in the tens of thousands of US dollars for a single coin. This makes it worth looking into for costly purchases or as a potential investment.
There are over 75 different cryptocurrencies to look into, all with their own values. At the moment, Bitcoin stands at around $17,900 per coin. Other coins like Litecoin and Ethereum are more reasonable at $72 and $1,700.
Blockchain technology, however, remains more or less the same.
How Does Crypto Work?
Cryptocurrency works via the Blockchain. This technology has many technical dimensions, but you don’t have to be an expert to understand the gist. In essence, the Blockchain is a sort of bookkeeping tool or ledger.
For every transaction you do, there is where the money is going and where the money is coming from.
Here is an example: your boss pays you for your work, you spend that money, and the business you spend it on gets that money. You’ve created a 3-step transactional process where the money changes hands twice. Crypto and the Blockchain work in a similar way.
Person A sends Bitcoin to Person B to buy something as a gift or investment. Person B then sends the Bitcoin to Person C for the same reasons. This 3-stage process creates a “chain.”
What makes the Blockchain unique is it uses advanced cryptography to safeguard this data. Each transaction only contains data of the transaction right before and after it. This immediate data is tamper-proof because of encryption.
A more comprehensive network of decentralized computers contributes to how this functions. This ensures no single person or computer has enough data to crack the encryption on any transaction.
Because this encryption is impossible to break, this greatly increases trust in crypto. Those who deal with legitimate crypto backed by the Blockchain don’t have to worry. Money laundering and most types of fraud are impossible.
Practical Uses of Crypto and How it Works in the Real World
The tech behind crypto and the Blockchain is acceptable in the digital space, but what about real-world applications? The dreams of Bitcoin becoming a substitute for hard currency still seem optimistic. It is now always possible to withdraw money from Bitcoin ATM.
However, many treat crypto as an investment. There are investment strategies for how you can diversify your portfolio this way. You don’t have to bear the full brunt of buying a whole coin.
Many investors buy fractions of crypto coins instead. A few years ago, when Bitcoin was going wild at $60,000 per coin, this was the only way for people to get in. Many coins are a little more reasonable, but crypto is still expensive.
In buying fractions of a coin, you treat a crypto coin almost like a stock. Others have likened it to buying a certain weight of gold bullion. While there are similarities, there are also serious differences we will cover next.
A Key Difference with Stocks
When thinking about crypto vs. stocks, there is a crucial difference. Stocks aren’t deregulated or decentralized like crypto. Stocks are also much, much less volatile. It would be a lie to say that the stock market doesn’t carry its share of risks, but it is essential to remember the scale.
Most of the time, the stock market made steady gains or losses, a few percentage points either way for a certain period. The only time the stock market goes off the rails is during a recession or depression. 2008 was the last major one; before that, we have to go back to the 1970s and 1929.
Crypto, on the other hand, can be very volatile. The price of one Bitcoin can change by thousands of dollars in a short space. It’s rare to see a $30 stock go up or down by more than $10 in a typical day, so going plus-minus $6,000 for Bitcoin is insane.
Now things aren’t all that bad. Crypto goes through periods of relative stability and seems to grow more often than it drops. That said, crypto is not the kind of investment for casual or passive investors.
Things happen quickly in the crypto space and market. Active investors can make very healthy profits, but those who miss the boat won’t. If you plan to invest in crypto casually, start small and prepare for the long haul.
Don’t panic-sell if you miss the initial drop, but wait for it to climb back up.
What Stocks Give You
It’s also worth saying that stocks give you something that crypto does not: ownership. When you buy stocks, you are investing in a company’s future and buying a small slice of it. People who invest in crypto believe in the future of the concept or the tech, but this is different.
When you buy stocks, you have a vested interest in the well-being of that company. You can affect company policy with enough shares or by joining with a block of other investors. This allows you to safeguard your interests and help ensure the company remains profitable.
Of course, this requires much more research and careful planning, but it can also be rewarding. Many large and profitable companies pay dividends every fiscal quarter. Not only can the value of your shares rise, but you can also make some extra cash while holding them.
Understanding the Risks
When investing in stocks or crypto, you have to understand the risks. Crypto can be more volatile than the stock market, but that doesn’t make it a bad investment for the right person. The stock market can also be dangerous for the uninitiated or those who jump the gun.
The cryptocurrency Ethereum is an excellent example of volatility. It started in 2021 at $730 per con. By the end of the first quarter, it was over $4,000.
Ethereum then dropped to $1,780 by the summer before finishing at $4,000 again in the fall. This rollercoaster creates plenty of opportunity but also tons of risk.
Crypto also doesn’t have the exchange protections that stocks do. This could change as the SEC opens the door to crypto more. However, nothing will change the deregulatory and anonymous nature of crypto.
For some, this is what makes crypto so appealing. For others, it makes it hard to trust crypto with their hard-earned money.
Like all things in life, moderation is key. Don’t put more into your investments than you can afford to lose. A diverse portfolio that includes both stocks and a few different cryptos is a solid idea.
If you want to dip your toes in the water, you can always get fractional crypto at whatever amount feels right to you.
Crypto vs. Stocks: What Do You Need to Know?
Knowing about crypto vs. stocks is the first step to becoming a better investor. Crypto and blockchain tech is here to stay, so it’s worth brushing up. At the end of the day, you can diversify your investments in the way that makes the most sense to you.
If you want more advice and informative content like this, check out our other blog posts! We have tons more articles on finance and crypto for you to explore.