Robert Steinadler, a year ago

Crypto vs. Stocks - What is the difference?

Most people think of Bitcoin when they come across the term “cryptocurrencies”. While it is true that Bitcoin was the first crypto ever to be invented, a lot of other digital assets got developed over the last ten years. Many of them resemble similar features like stocks or just plain and simple trying to replace stocks and stock trading as we all know it.

This begs the question of what the difference is between cryptocurrencies, crypto assets, and stocks. In this article, we are diving down a little deeper and taking a closer look at those questions.

Stocks are well established

Stock trading reaches back to the year 1585 and it is needless to say that this particular asset class is very well established. It can yield long or short-term returns which makes it interesting for different types of investors. Crypto on the other hand was born in the year 2009 with the start of Bitcoin.

While stocks can sometimes face high price volatility it is almost certainly guaranteed that crypto assets will. Therefore, crypto is often considered to be the riskier asset class.

A stock represents the partial ownership of equity in a business. It also reflects on the value of the business even though the market can be irrational and price the stock over or under the fair value of the company. That being said, the stock price is moved by different factors such as the company’s revenue, total economic growth, and also good or bad news. Even events that are totally happening outside a business can have an impact on the price if the market perceives them as related.

Crypto is a new asset class

Cryptos are entirely different from stocks. Cryptocurrencies are based on their own blockchain and unlike fiat currencies, the monetary policy is defined by a protocol instead of a central bank. Tokens are also part of crypto and they usually run on top of a blockchain and can serve different purposes that can be freely defined and executed by a smart contract. Examples would be a utility token, a stablecoin or an NFT.

Therefore, they can serve a variety of use-cases which includes tokenized equity in a company like a stock but is not limited to it. In fact, most cryptos are not affiliates with equity at all.

Instead, they offer the opportunity to speculate on the price development or to gain income by staking, mining, lending or yield farming. Another use that applies to crypto is that it can be a medium of exchange or a store of value.

What is the difference between investing in crypto and stocks?

Both asset classes can be used to build a portfolio or trade them short-term. There are a few notable differences in doing so. As we already pointed out before, buying or owning crypto doesn’t come with equity in a company. That is only the case when buying a security token offering, which is very rare.

While crypto investors can receive passive income from staking or lending, no dividend is involved. In fact, most opportunities to gain additional income by holding crypto require some sort of activation or investment of the crypto assets.

Last but not least, the stock and crypto markets are very different. Stocks can usually only be traded on weekdays and within working hours. The crypto market on the other hand is always available and never sleeps.

What are the pros and cons of investing in crypto or stocks

Both asset classes have their pros and cons or limitations. Please note that the decision to invest in an asset class should be done after careful consideration. Generally speaking, each investor has to weigh the ratio between the risks and rewards of his investments.

Pros of crypto investing

  • Always accessible: All you need is a smartphone or desktop PC, and an internet connection
  • Decentralized infrastructure: Many investment opportunities are not relying on a central entity. Crypto is censorship-resistant.
  • Monetary policy: Cryptocurrencies are not controlled by a central bank and cannot be inflated. The emission rate of tokens and cryptos is defined by the protocol.
  • Flexibility: Stocks only offer limited options to create income. With staking, lending and yield farming cryptos are more versatile.
  • More than an investment: There is not only a monetary value attached to crypto. Investors can buy fan tokens and get in touch with their favorite stars or they can collect art that they cherish by purchasing NFTs.

Cons of crypto investing

  • Volatility: The price swings in the crypto market not only offer chances but also include high risks. Investors always have to take into account that a catastrophic loss is possible. On the upside, one could make a fortune overnight.
  • Uncertain regulation: While there are several approaches for better regulation and more clarity, certain aspects are still under negotiation. This can cause potential compliance issues and devalue an investment.
  • Custody risks: Not your keys, not your coins. Losing your seed or private keys when hosting a wallet by yourself can lead to a total loss.
  • No returns are guaranteed: Financial markets are always a risk and so are crypto assets. There is no guarantee that the price will develop in a certain way or direction. Past results are in no way connected to the performance of crypto assets in the future.

Pros of stock investing

  • Improved accessibility: While it was more difficult to invest in stock 20 years ago, fintech has changed the sector quite a lot. The stock market is not always open but it can be accessed without too much of a hassle.
  • Clear regulation: Stock markets and stocks are well regulated and each government exercises oversight. Binding rules are protecting the interest of investors, companies, as well as stock exchanges, market makers, and brokers.
  • Variety of investment opportunities: There are as many stocks available as there are different companies in the world. This allows investors to get involved in different industries and countries.

Cons of investing in stocks

  • Volatility: While crypto is highly volatile, the stock market can be volatile, too. Price volatility increases when trading penny stocks and decreases usually when investing in more established securities. However, even a big company with reputable stock can face a catastrophic situation. Therefore, volatility shouldn’t be underestimated.
  • Higher trading fees: Most retail customers choose their bank as their stockbroker and banks usually charge high fees. The fee structure in crypto is usually lower and more competitive. It also allows investing smaller amounts that would be eaten by fees in the stock market.
  • Returns are not guaranteed: Again, all returns and stock performance are not guaranteed. Unlike with traditional savings account, there is a chance of a total loss as with all speculative assets.
  • Less availability: While accessibility has improved, availability is still not on the same level as the crypto market. Stocks markets are usually closed at the weekends and only open during weekdays. This limits the opportunities to act since many retail investors only find time for managing their portfolios after returning from work.
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