For many decades, the list of assets people could invest in remained the same: stocks, bonds, real estate, commodities, and others, with stocks being the most widespread and allegedly reliable choice. However, progress does not stand still in any field, and finance is no exception. The emergence and popularization of cryptocurrencies have revolutionized the conservative financial realm and made people around the world wonder if they could be a better asset of choice for investment than stocks. Cryptocurrency vs. stocks: the struggle to pick between these two options is troubling both real and potential investors.
Let’s try to figure this issue out. But first, let’s get into the essence of these two types of assets.
Stocks: An Overview
Stocks are securities that provide their holders with a fraction of the legal ownership of a particular company. On the stock market, companies sell their shares to individuals who want to benefit from their growth, thus entering mutually advantageous partnerships. If the company makes a profit, shareholders get dividends, the amount of which depends on the number of shares they own. Another potential way to profit from stocks is by buying and selling them, directly or via derivatives, and profiting from their price fluctuations.
When considering an asset as a subject of investment, it is also important to understand what can affect shifts in its value. Stock prices change based on the success of the company that issued them, the growth indicators shown in annual reports, and, as the past few years have shown, the company’s reputational gains and losses.
Crypto: An Overview
Cryptocurrencies are digital assets that are created, distributed, and transacted using blockchain technology. They do not exist in any material form, unlike shares, and have no intrinsic value. This means that the value of cryptocurrencies is not supported by any hard assets in the real world. Stablecoins, which are backed by reserves in the currencies to which they are linked, are the only exception to this pattern. Furthermore, cryptocurrencies are decentralised and mostly uncontrolled. When these elements are combined, crypto becomes significantly more volatile than other assets, including stocks, generating various extra opportunities as well as risk considerations for investors.
Since cryptocurrencies have no intrinsic value, the factors affecting their price are more complex. They include supply and demand, public attitudes toward the underlying technologies that underpin a particular coin, the endorsement of cryptocurrencies by authoritative opinion leaders, and other aspects that are often unpredictable.
One way to safeguard against the impact of inflation is by exploring how to hedge against inflation, which can be achieved through various investment strategies, including diversifying one’s portfolio with assets such as cryptocurrencies and stocks.
Cryptocurrency vs. Stocks: Pros and Cons
Now that we have a general understanding of the two types of assets, we can compare cryptocurrency vs. stocks and figure out the pros and cons of each.
Crypto would not have gained popularity so rapidly if it did not have a set of undeniable advantages over other assets. Here are some of them:
- Increased potential profitability: Cryptocurrencies are the most volatile asset available to investors. Their value can increase several times in relatively short periods, which cannot be said about other assets. Therefore, if investors have cause to assume that a particular cryptocurrency may enter a bullish phase, they may be able to generate substantial profits in the near term.
- A wide selection of cryptocurrencies: As of mid-2022, there were over 12,000 cryptocurrencies in the world. Their number is growing consistently, making the cryptocurrency market one of the most dynamic in existence. Consequently, crypto enthusiasts have the possibility to profit from any cryptocurrencies that interest them.
- Global interest in cryptocurrencies: Crypto is a new and attractive asset for many people around the world, from enthusiasts to professional investors. In addition, cryptocurrencies play an important role in the development of the new iteration of the Internet, known as Web 3.0. Since the growth of the value of crypto largely depends on its demand, it is safe to say that this group of assets will not lose popularity in the coming years.
- High and unpredictable volatility: Although the volatility of cryptocurrencies can be seen as a positive factor capable of increasing their value overnight, this coin also has a downside. Because crypto has no value in and of itself and its price changes based on many factors, it can quickly lose value, causing the person who owns it to lose a lot of money.
- Regulatory issues: Currently, crypto is a decentralized and deregulated asset. However, countries and international organizations are actively working on the development and implementation of regulations. Sometimes, they can take radical forms, such as banning the circulation of cryptocurrencies in China. Future regulations could make crypto holders’ choices much more limited, which adds to their risks.
- Cybersecurity issues: Cryptocurrencies are completely digital. As a result, they are more susceptible to cyberattacks. This is one of the most critical arguments in the cryptocurrency vs. stocks dilemma since stocks are not digital assets and cyberattacks can do little damage to them.
- Stocks are time-tested: Investing in stocks is one of the oldest ways to make money in the financial markets. As a result, this process is perceived as a more predictable one. Although the returns from shares are significantly lower than those from crypto can potentially be, they are relatively stable in the long term.
- More thorough regulation: This point follows from the previous one, because the presence of detailed and comprehensive regulations is a direct consequence of the long history of investing in stocks. Be that as it may, stock transactions and the activities of all agents involved are indeed regulated in all aspects, making this area more predictable and reliable.
- Intrinsic value: The value of stocks is supported by the value of the property of the company that issued them. This makes their price more stable and increases the liability of the company in case of any unforeseen circumstances.
- Lower earning potential. In the cryptocurrency vs. stocks dichotomy, crypto clearly wins in terms of potential gains. Stocks, on the other hand, are a reliable source of income that generates modest profits that typically fluctuate around ten percent over time.
- Stocks are tied to the traditional economy. Thus, economic crises, inflationary processes, and other scourges of the global economy can have a direct impact on them, which is not so much the case for decentralized digital finances, which are cryptocurrencies.
- Volatility based on company performance. Although stocks are less volatile than cryptocurrencies, recent years have proven that their value can drop drastically if the companies that issued them suffer reputational damage. Consider the recurring declines in Tesla stock in the context of Elon Musk’s controversial statements. As a result, the assumption of stock stability is somewhat exaggerated.
Obviously, both stocks and cryptocurrencies have their advantages and disadvantages. When deciding between cryptocurrency vs. stocks as an asset, you should think about your own goals and plans.
So, if you are looking for stable yet modest profits in the long term, it is better to focus your efforts on investing in stocks. At the same time, you should keep in mind the risks of this asset, such as exposure to inflation, economic crises, and reputational issues.
On the other hand, if you want to make potentially high returns in the short term, crypto is the option for you. Most of the disadvantages of cryptocurrencies described above can be mitigated through strategic planning, tracking factors that can lead to a drop in the price of coins, reacting to market changes timely, and choosing a reliable crypto exchange with a high level of cybersecurity. If you are confident in your abilities, you can buy cryptocurrencies and start your crypto journey right now.