What is the difference between Stock and Cryptocurrency Markets?

Wed Apr 19 2023

As two different asset classes, cryptocurrency and stocks are both have their own set of strengths and weaknesses. It's good to be aware of these before investing. Read more.

Cryptocurrencies and stocks are two types of financial instruments that are used by investors to build wealth. While they are different asset classes, they share some similarities, including being tradeable and serving as investment vehicles. Before considering investing, whether manually or using an algorithmic trading platform like Æsir, it’s good to understand that risks and rewards of both asset classes.

What is Cryptocurrency?

Cryptocurrencies are digital currencies powered by blockchain technology. They rely on cryptographic techniques to secure and verify transactions and are typically used as a medium of exchange and a store of value. Most cryptocurrencies run on decentralized networks, and their market value is driven by supply and demand.

What is a Stock?

Stocks represent partial ownership of equity in a business, and they reflect the value of a functioning company. Sometimes, the owner of a stock is also entitled to a share of the company’s profits in the form of a dividend. The value of a stock can move according to the company’s performance and other factors such as relevant news announcements.

Differences Between Cryptocurrencies and Stocks

Both cryptocurrencies and stocks can be used by investors to build wealth. Yet, investing in stocks is different from investing in crypto. Unlike stocks, investment in crypto doesn’t come with ownership of a share of a company. Crypto investors also don’t receive dividends in the traditional sense. Instead, one can lend or stake their crypto tokens for passive income. There are also major differences in how crypto and stocks are traded. You can buy crypto at any digital currency exchange at any time of day and night, while stock exchanges operate with limited opening hours on weekdays.

Pros and Cons of Investing in Cryptocurrency

Pros of investing in crypto

• Accessible: Crypto is borderless, and anyone with an internet connection can use it.
• Decentralized: Most cryptocurrency systems don’t rely on a central authority, making crypto resistant to censorship and centralized control.
• Inflation-resistant: Cryptocurrencies aren’t directly influenced by central banks’ monetary policies, so their prices are less malleable to inflation. However, cryptocurrencies are not all the same, so it’s important to consider the issuance rate and supply of each crypto asset.
• Flexible: Compared to stocks, there are more ways for investors to grow their crypto holdings besides trading. Crypto investors can get profit from yield farming, staking, and providing liquidity. Products such as Binance Earn are a great example of how you can increase your crypto holdings.
• Varied: The value of many tokens is not just monetary. For one, Fan Tokens can provide token holders exclusive benefits and privileges with their favorite sports teams or brands. Some cryptocurrencies are governance tokens, which give holders the right to participate in the development of a respective project or protocol.

Cons of investing in crypto

• Price volatility: The crypto market is famously prone to dramatic price swings. The potential for quick gains can be very attractive to new investors. However, they should be aware that its flipside is the potential for equally dramatic losses.
• Imperfect regulation: Cryptocurrencies are legal in many countries, but they’re not fully and universally regulated. Investors should be mindful of potential compliance issues and do legal research according to their location.
• Custody risks: Cryptocurrencies like Bitcoin require a private key to access the tokens stored in a digital crypto wallet. Forgetting a seed phrase or losing a physical crypto wallet could result in losing access to your crypto forever.
• Returns not guaranteed: Like any financial market, there are no guaranteed returns with crypto. While Bitcoin and other altcoins performed well in the long term, there is no guarantee that they will continue going up in the future, and there is always a chance they may not do well during a shorter investment period.

Pros and Cons of Investing in Stocks

Pros of investing in stocks

• Increasingly accessible: It is becoming easier to invest in stocks, with many online platforms and mobile apps emerging in the market. Many such offerings have intuitive interfaces and are integrated with other financial services.
• Regulated: Many governments heavily regulate the stock market. For example, in the US, publicly traded companies must disclose information that can impact their stock value to the Securities and Exchange Commission (SEC) — a government oversight agency in charge of investor protection.
• (Somewhat) inflation-resistant: Certain types of stocks, such as Treasury inflation-protected securities (TIPS), can act as a hedge against inflation.
• Variety: There is a wide selection of stocks across different industries and sectors that are available to retail investors. Traders can choose equity based on a large number of criteria, from the company’s business model and location to whether or not they pay dividends.

Cons of investing in stocks

• Volatility: The stock market, too, isn’t immune to sudden changes in prices in the short term. If a company is doing well, its stock prices will likely go up. Similarly, if a company reports losses or receives bad press, the stock value will likely go down. Furthermore, some stocks may be more volatile than others. For example, the value of growth stocks tends to fluctuate more than that of blue-chip stocks that represent shares in established companies with flawless reputations.
• Higher fees: In most cases, the fees associated with stock exchange transactions are relatively high, and there are more of them compared to cryptocurrency trading. On top of brokerage fees and commissions, there are also other charges when you purchase or sell your stocks.
• Returns not guaranteed: Like any financial market, there are no guaranteed returns with stocks. While there are stocks that often outperform alternative investments in the long term, there is a chance that they may not do well during a shorter investment period.

Should I Invest in Cryptocurrency or Stocks?

Both asset classes have their advantages and limitations. The decision depends on your risk tolerance and other preferences. Ultimately, what drives the success of your investment is your ability to weigh the risks and rewards and not the investment vehicles that you use. Many experienced investors diversify their portfolios, getting exposure to both cryptocurrency and stocks.

Closing Thoughts

In conclusion, cryptocurrency and stocks are two different investment vehicles that can serve different purposes in your portfolio. It’s important to weigh the pros and cons of each option and consider your risk tolerance before investing. Regardless of which one you choose, always make sure you’re aware of the associated risks and DYOR (do your own research).