Crypto vs Stocks: What Are The Similarities and Differences

Nowadays, when someone gets their hand on some money that they won’t need in the near future, they usually try to look for ways to get some use out of it. One of the most common and popular ways of doing this is to invest in something and earn profits from the money you are not using. When investing in today’s financial markets there are 2 popular ways people approach this subject. They either go the old-fashioned way and invest in stocks or shares, while others look to the future and invest in cryptocurrencies. Both are financial assets that have their own dedicated markets, trends, and behavior, and while they are unique, there are still some similarities between them. Today we will be taking a look at these two assets in order to learn more about each of them.

What are cryptocurrencies

Cryptocurrencies are digital assets and are part of blockchains, which are ledgers that contain very large amounts of data and encompass all transactions made using the blockchain. There are many different types of cryptocurrencies that hold different utilities on the blockchain. Some cryptocurrencies are used for transaction fees, there are utility tokens that are used for services provided by the networks that own these tokens, and there are also governance tokens that resemble stocks and give you partial ownership of the project it is associated with.

These cryptocurrencies are not backed by any hard assets, with the exception being stablecoins that are backed by USD. What this means is that, these tokens are speculative assets and their price purely depends on what people think of this crypto and if they want or don’t want to buy it. There are cases when the price of crypto might drop or rise without any significant reason, which makes trading them a bit difficult.

What are Stocks

To put it simply, stocks are parts of a company that you can own. When you buy stock in a company, you are buying a part of the company and the amount of stock you buy will represent how much of a company you own. Just like cryptocurrencies, there are different types of stocks, but with fewer different variants. For example, the stock you invest in might give you dividends, which are a portion of profits made by the company, while some stocks might not give you anything at all and you just keep your shares (the stocks you own) hoping that the value of the company will increase

Stocks, unlike crypto, have companies behind them that give them definitive value. Whenever a company is doing well, gets big investments, and generates good profits, the price of a stock goes up. When a company is performing poorly, losing a lot of money, and investors are leaving, the price of the stock drops. This gives investors the ability to analyze the market more easily as they have something concrete to look at.

Main differences between Crypto and Stocks

While both cryptocurrencies and stocks are financial assets that can be traded and share some similar characteristics, there are major differences between these two assets. Knowing these differences will help everyone who is interested in investing in these assets, as each of them requires a different approach and style of investing. Now let’s take a look at some of the most important differences between these two assets.

Price Volatility

One of the major differences between stocks and crypto is how volatile their prices are. Volatility means how much the price moves in short periods of time, be it the price going up or down. This volatility is very important to consider when investing and higher and lower volatile assets need different investment approaches.

In terms of volatility, cryptocurrencies are way more volatile than stocks. The major contributor to this volatility is that cryptocurrencies are speculative assets. Since most cryptos are not backed by any hard assets, their price is determined by what people think of these tokens, which creates different views between investors and prices can easily see a 10% change in price on a single day; or even more in some cases. While stocks, on the other hand, are tied to the companies they represent, which gives people a way to determine the worth of the stock and their prices are not just speculations. This creates a more stable market and a 10% change in one day is really uncommon among top stocks.

History

Another major difference between stocks and crypto is the history behind these assets. Stocks have been around for centuries and the first ever stock exchange was created all the way back in 1611. Ever since then, almost every country in the world has started to introduce its own stock exchanges, which grew this market even further. Visiting these stock exchanges, you will be able to buy stocks of the companies such as Google, Apple, Microsoft, and many more major players.

While on the other hand, the crypto market is an infant compared to the stock market, as the first crypto was created just 13 years ago in 2009. But ever since then the crypto market has seen huge growth and attracted a large number of investors. But still, the lack of a long track record gives investors reason to look at this market with skepticism and not trust it as much as the stock market.

Diversity

Diversity is another major difference between stocks and crypto. Any company that meets the requirements of going public and being listed on a stock exchange has the ability to sell its shares to raise capital. What this means is that investors who are looking to invest their money somewhere can choose from many different fields. There are stocks of tech companies, the health sector, construction, oil, and many others. This gives investors the ability to invest in different sectors at the same time, giving them a diversified portfolio, and if one sector takes a big hit, investors will not be losing all of their investments.

On the other hand, almost every cryptocurrency is associated with blockchain technology and its development. Despite there being more than 21,000 cryptocurrencies, most of them operate in the same field and give low diversification ability. This can be easily seen just by looking at how almost every crypto is dependent on the price of Bitcoin. Even if you invest in different cryptocurrencies operating different services, if the price of Bitcoin falls significantly, the value of your investments will most probably fall as well. This creates major risks of suffering big losses and there is less possibility for risk management. A good example of this is when cryptocurrencies crashed in early 2022. When Bitcoin started to lose value, as people started taking out profits after Bitcoin peaked in November 2021, almost every other crypto followed suit and started to lose its value. So if you had investments in the top 10 cryptocurrencies by market cap, you would have suffered huge losses across the board. But if you were to invest in the top 10 stocks by market cap, the fall of Apple, the largest company by market cap, will not affect all the other companies in the same way as the fall of Bitcoin influences all of crypto.

Laws and regulations

Another difference between cryptocurrencies and stocks are laws and regulations around these two markets. Since stocks have been around for centuries and the world’s largest companies are operating in this market, this market is highly regulated by different government bodies. These governing bodies have the right to investigate any company on the stock exchange to look for wrongdoings. Considering the amount of money moving through the stock market each day, there is the possibility of making very large sums of money by means of fraudulent activities, and these government bodies are there to stop anyone from doing this. If caught perpetrating these foul acts, companies and individuals can receive millions of dollars in fines and many people have gone to jail for manipulating the stock market.

While on the other hand, the crypto market is not being as tightly regulated by these government bodies. Cryptocurrencies are built with decentralization and anonymity in mind, which makes it really hard for regulators to use current laws and regulations in this market. While there are some benefits to having decentralization and anonymity, the crypto market has become a place for criminals to move and wash their money. But things are advancing and some governments have started to implement regulations over centralized crypto exchanges, while decentralized exchanges still remain mostly unregulated, where you can buy and sell cryptocurrencies without providing any of your personal information.

Scams

While both crypto and the stock market have scammers operating around them, the difference between these two is the difficulty of pulling off these scams. The reason for this difficulty comes from the laws and regulations patrolling these markets.

Stock markets are highly regulated meaning that major scams are not that common. For someone to pull off a scam on a major scale, they would need a lot of connections and also a lot of capital in order to use methods of hiding their tracks. For example, someone can not just go and list their stock on major markets such as the New York Stock Exchange or London Stock Exchange, and companies have to pass many different inspections before being able to sell their stock there. Then of course the challenge is to sell your stock, as most stock investors are doing tons of analyses before buying any stock.

Since crypto exchanges are not tightly regulated, the ability to scam people is much easier. Most crypto exchanges are competing with each other, and to gain a competitive advantage, they might not screen some cryptocurrencies too thoroughly before listing them on their exchanges. This makes it easy to list your cryptocurrency on major crypto exchanges. Also, since cryptocurrency investors are most active on social media platforms, it is much easier to advertise your token and create a false narrative. Since most crypto investors are not well educated in cryptocurrencies and are simply there because they want to find the next Bitcoin, it is not too difficult to convince them to invest in random crypto projects. Ruja Ignatova, a Bulgarian businesswoman, who is currently on the FBIs top 10 most wanted list, managed to convince people to invest in a cryptocurrency that in reality was not crypto at all. She managed to get away with $ 2 billion of investors’ money before people realized the trick. This does not mean that there are no such scams on stock exchanges, quite the contrary, the stock market has seen much larger scams, but the difference here is the difficulty of pulling these scams off.

Should you invest in stock or crypto?

When talking about which of these two assets you should invest in, the answer should be based on what kind of investment you want to make. If you are all-in on cryptocurrencies being the future of finances and the web, then investing in crypto should be your go-to strategy, but you should be ready to see your investment go up and down pretty significantly on a constant basis.

If you are someone that values the security and safety of their investments, then stocks should be your go-to. Since stocks have a long history and are tied to actual companies with provable value, you can easily diversify your portfolio, which will not tank with the downfall of just one stock.

If you still can not decide which route to take, the best option probably is to invest in both of these assets. You can divide your funds across these two asset classes and get a piece from both markets. You can divide your portfolio evenly, or you can invest more in stocks and a bit less in crypto, because of high volatility. When doing so, make sure to diversify your portfolio even further by investing in stocks associated with companies operating in different fields and cryptocurrencies that don’t have the same utility.

FAQs on stock vs crypto

Is crypto more volatile than stock?

Generally, cryptocurrencies are way more volatile than stocks. Since cryptocurrencies are not backed by any hard assets, their price depends purely on speculation and people’s belief in them. Because of this, their price goes up and down throughout the day and can show changes of over 10% on any given day. Stocks don’t tend to be this volatile, since they are tied to companies, and if nothing major happens their price remains somewhat the same with maybe 2-3% daily change.

Is crypto riskier than stock?

Cryptocurrencies are known to be more risky investments than stocks. Since cryptocurrencies are volatile assets and their price comes from speculation, they can easily lose value without any prior signs or reasons. Stocks have a way longer history and as they are tied to tangible companies, this market is stable, which makes them less risky and less volatile investments.