- Cryptocurrencies are blockchain-based digital assets usually tied to a blockchain project. However, it does not represent ownership in the project, and its price is determined by supply and demand.
- Stocks represent partial ownership in a company, and their prices are primarily driven by the company’s performance, among other things.
- The differences between the asset classes include the surrounding regulations, ownership, maturity, trading times, volatility, etc.
- With crypto investing, the pros include financial inclusion, decentralization, inflation resistance, and flexibility, while the cons are volatility and the need for self-custody.
- With stocks, the advantages are inflation-hedging, sub-diversification, and accessibility. And the cons include manipulation, high fees, and delayed reflection of purchases.
We have an epic bout today.
On the one side, we have a strong, mature, and regulated asset class called stocks. On the other hand, we have a young, dynamic; a little crazy peer called cryptocurrency. We often make the mistake of treating these asset classes similarly. However, in reality, they aren’t really that similar. In fact, the only common thing between stocks and cryptocurrency would be that both are investable and tradable assets. And that’s pretty much it. So today, we will participate in the stock market vs cryptocurrency debate to tell you how they are different.
What Is Crypto?
Cryptocurrencies are digital assets powered by blockchain technology. Cool. “But my stocks, mutual funds, and money are digital too. What’s so special here?” Well, the entire show here is run in a decentralized manner. This means no intermediary is handling these transactions. “Alright. But who takes care of the security then?” Turns out that cryptocurrencies are secured by cryptography (hence the name). A group of nodes (computers) validates each transaction to ensure that there are no bad players in the ecosystem.
Since cryptocurrencies have no underlying asset (except for some stablecoins), the price of crypto is often determined by supply and demand.
What Are Stocks?
Stocks represent partial ownership in a company. This means that stocks have an underlying entity, and you are investing in that company through stocks. And since a stock or a share represents the company, the price depends on the company’s performance and other related factors like news and PR. At times these companies would also announce dividends. Dividends are a share of profits earned by the company in a given period.
6 Key Differences Between Cryptocurrency & Stock Market
Although both asset classes can be used to build wealth by investors, there are some fundamental differences between them. The table below highlights these key differences.
|Regulations||Stocks are regulated by a government authority like SEBI or SEC. All the companies that raise money through stock markets must undergo a thorough auditing process.||The crypto sector is unregulated in most parts of the world right now. Some cryptos are audited via some third party, while others aren’t.|
|Ownership||Stocks give you partial ownership of a company. You are also eligible to vote for the key company decisions as an investor.||While the token you hold has some sort of utility within its ecosystem, it does not give you ownership of the project.|
|Fractional Buying||At least in India, you cannot buy a fraction of a stock. For example, one share of MRF costs about INR 80,000. It is very difficult for retail investors to buy such stocks||Crypto enables fractional ownership. You can buy a billionth part of a Bitcoin or Ethereum as required.|
|Maturity||Stock markets are very old. In India, trading began in NSE about 30 years ago. This means there is significant data available to evaluate the stock market.||The crypto market is relatively younger. Past cycles do not match each other in terms of macro trends.|
|Tradability||Stocks can be traded on a fixed number of days for a fixed number of hours each day.||Crypto is global. It can be traded 24x7x365.|
|Volatility||Stocks are less volatile as they are established over a period||Crypto is more volatile.|
Advantages and Disadvantages of Investing in Crypto
Investing in cryptocurrency has both advantages and disadvantages; let us talk about them in depth.
Probably the biggest advantage of cryptocurrency is that it is a novel technology. This means one has a chance at exponential returns if this falls in place. Apart from that, some inherent benefits of cryptocurrency are as follows:
Cryptocurrency is the biggest driver of financial inclusion. The world has approximately 1.7 billion unbanked individuals. Of them, 1.3 billion have access to smartphones and the internet. And the best part is that you don’t need anything other than the internet to start your crypto journey.
Furthermore, the NYSE or New York Stock exchange roots back to 1792. Whereas BSE, or Bombay Stock Exchange, started in 1875. That’s a difference of more than a quarter century.
However, crypto doesn’t discriminate. It was available to the entire globe on the very first day of its discovery.
Another factor adding to inclusivity is the fact that investing in US/EU stocks from India is a cumbersome and complicated activity. In the best-case scenario, it takes up to 24-48 hours to fund your trading wallet. Compare that with crypto, which can be purchased from any exchange within a few minutes.
There is no centralized authority governing crypto. This makes it unsusceptible to government interventions like confiscation and censorship etc. For example, it is extremely easy for the government to freeze your bank and Demat account. Why? Because you have outsourced the ownership of these assets to a centralized authority like a bank or a stock exchange.
In the case of crypto, you have the option of holding your wallet’s private keys (think password). As a result, you are the true owner of your assets.
This applies to cryptos with limited supply, like Bitcoin, Litecoin, etc. Since these cryptos are fixed in supply and cannot be printed at the order of a central bank, it makes them resistant to inflation. In other words, they hold their purchasing power.
Governments and banks levy strict rules on how individuals can use their money. For example, withdrawal limits, maximum capping, and a specific return you can extract from an asset. Apart from that, there are limited options to grow your wealth. On the other hand, crypto offers a wide variety of options like yield farming (a way to earn crypto by lending crypto), staking, etc.
And just because crypto is new, there are also some risks associated with them. Let us have a quick look at those:
1. Price volatility
Crypto markets aren’t regulated. Unfortunately, that leads to a lot of volatility as any news related to the government’s stance on crypto causes a panic sell. Although this works in both directions, these violent bouts of volatility negatively influence mass adoption.
This is true for every asset in its nascent stage. Even the volatility for Bitcoin has come down significantly in the past 3-4 years due to significant adoption. This will continue to come down as regulations and adoption kick in.
2. Self-custody: a double-edged sword
Cryptos enables ownership in the truest sense. You own the crypto and the keys (password) to access them. However, if that is the case, your crypto becomes inaccessible if you forget your password. To top it off, there’s no recovery mechanism either.
Advantages and Disadvantages of Investing in Stocks
Moving on to this brother from another mother. While stock markets are older, it doesn’t mean they are free from all manipulations. However, this does not disregard the benefits of maturity that come alongside. Let us discuss them both.
Perhaps the biggest upside of stocks is that they have the government’s backing. This provides a cushion for retail investors in case things go haywire. Apart from that, there are some other advantages too.
1. Hedge against inflation
Inflation is an unavoidable beast. If you keep your savings in a bank account that offers you a yield of 1-3%, you are losing money each year. How? Your purchasing power keeps on decreasing due to rising inflation. Stocks, on the other hand, offer you returns to the tune of 12-15%. This is higher than the rate of inflation, thus safeguarding your money at all times.
Stocks allow you to invest in companies belonging to different sectors. As a result, you can gain exposure to different sectors within the same asset class. This helps you diversify your portfolio.
All key stock markets of the world have moved away from physical certificates to digital versions of ownership. This ensures that stocks become increasingly accessible to more and more people through online applications.
Here are some downsides of investing in the stock market.
Although government agencies overlook the entire market, there are examples of manipulators getting away with scams. Every now and then, we’d see the regulators issuing notices or penalizing some companies involved in illicit activities.
Stock market investing is a function of multiple authorities like banks, regulators, brokers, and issuers. This means that all of them need to be compensated when you purchase a stock. This results in high fees while executing a trade.
More intermediaries also mean more validations. Stocks take about two days to get credited to your account after purchasing them. This is in stark difference from crypto, which gets credited almost instantly.
Stocks Vs Crypto: Which Is More Volatile?
Generally, stock markets are relatively less volatile as compared to crypto. But that doesn’t mean that stock markets are stable. Depending on federal policies and interest rates, stock markets are also volatile. But crypto markets have to deal with way more uncertainties than stocks. With that being said, this volatility brings in a good opportunity for traders to earn a regular profit. While the stock market has upper circuits (maximum a stock can go up in a day after which trading halts), there are no circuits in crypto.
Should I Invest in Crypto or Stocks?
This is like asking a parent who their favorite child is. To grow wealth, one should side with both asset classes. However, you need to consider time horizons and risk appetite as a part of this exercise.
Crypto is extremely volatile and might yield results in the long term as compared to stocks. This is because stocks have already established themselves as an asset class, and crypto is still dabbling with regulations.
Besides that, crypto is also riskier than stocks as it is driven by the forces of supply and demand and fundamentals. This means that there is no underlying asset,, so predicting demand can be daunting.
But with high risk comes higher returns. Bitcoin has outperformed every single asset class out there in the past decade. This is why allocating a small, fixed portion of your portfolio to crypto assets is recommended.
Now that you have a PoV on what route to take, here are some ways to get you started.
How do people invest in crypto?
Investing in crypto has become increasingly easy and accessible to the masses. Simply head over to any crypto platform, complete your KYC, link your bank A/C, load your wallet and start investing.
If picking cryptos sounds like a task (because it is), there are ways to mellow down this agony – Coin Sets. These are crypto baskets based on the idea of index investing. It believes that investing in an overall market is better than investing in individual cryptos. Even if one or two cryptos fail, you have others to offset those.
How do people invest in stocks?
Investing in stocks involves signing up for a broker application. E.g. Robinhood, Zerodha etc. Once you sign up and connect your bank account, you can start purchasing stocks. People also invest in mutual funds or ETFs, which are a basket of stocks managed by experts. However, this method does NOT entitle you to dividends as compared to individual stocks.
Crypto is soon becoming the go-to asset class for getting your hands dirty in the world of investing. Similarly, stocks have been a darling asset class for individuals who aim to stay on top of market buzz. These asset classes will help you build wealth and also put you at the forefront of financial innovation in your country. When investing in these asset classes, remember that you are in the top minority who has decided to go for it.
1. Is it better to invest in stocks or Bitcoin?
Stocks and Bitcoin are different and belong to different asset classes. It is equivalent to comparing real estate and fixed deposits. Depending on your time horizon and risk appetite, an ideal investor should diversify into both asset classes.
2. Is crypto easier than stocks?
In terms of the learning curve, crypto is very similar to stocks. However, one needs to understand that you cannot blindly apply all the rules of stock investing to crypto. Other than that, each crypto has its own tokenomics. In other words, the total tokens to ever exist varies for each crypto, impacting supply and demand, hence the prices. But if you want to make crypto easier, you should invest in themes instead of individual crypto, and Coin Sets is a brilliant tool for that.
3. Which is safer in India, stocks or cryptocurrency?
In terms of safety, stocks are regulated by SEBI. However, this makes them prone to centralization risk. If SEBI fails, the stock market will tumble. On the other hand, cryptocurrency is decentralized. Since code governs everything, it is relatively safe in terms of security. However, when it comes to regulations, crypto is still evolving.
4. Can crypto make you rich?
Yes and No. If you really want to be rich by investing in crypto, you need to learn and apply your knowledge to pick the best bets. Because many coins will go down to zero, and if you are not doing your due diligence, it may backfire.