10 Major Differences Between Crypto and Stocks
If you're new to crypto but a veteran with stocks, understanding the differences between crypto and stocks can help you decide where you want to invest.
Cryptocurrencies are now the new frontier of investments—and even Wall Street has started to take notice of it. People are talking about the next great ICOs, investing in blockchain technology, and even adding cryptocurrencies into their portfolios all the time.
While cryptocurrency has its ups and downs, it's still going strong. In fact, it's actually fairly safe to call cryptocurrency an increasingly mainstream phenomenon. Even major investment firms like Merrill Lynch have started to roll out funds that involve Bitcoin and Ethereum in them.
A big issue crypto has deals with the way investors perceive it. Most beginners don't know the differences between crypto and stocks—and end up getting burned because of it.
Before you plunk down money on crypto, make a point to remember that investing in tokens isn't the same as investing in stocks.
The biggest differences between crypto and stocks can be seen in how each are valued.
Stocks are backed by legitimate companies that are expected to turn a profit. They involve physical assets as part of their valuation, and you can determine whether a stock is valued correctly on market price using math.
Cryptocurrencies, on the other hand, aren't always backed by companies. They are mostly valued based on the hype they have, though some also get valuation raises based on their functionality. Since it's a more subjective valuation, it's not always easy to predict whether a currency is worth it.
Anyone can make a cryptocurrency, while stocks have to be issued out by special groups.
One of the reasons that cryptocurrency became known as "rebellious tech" is that anyone can make their own blockchain ledger. Many long time digital currencies, such as Dogecoin, were actually made by groups of bored programmers.
Since anyone can make a blockchain token, it's easy enough to start your own ICO. The same cannot be said, however, for stocks—especially those traded on the NYSE, NASDAQ, or Dow Industrial.
When stocks are created, they have to be cleared by government agencies and audited. They also have to adhere to certain regulations before they can even hit the market.
Stocks are made for a very simple reason: fundraising for companies that need the money. Cryptocurrencies are a little bit different, because a single currency can have multiple purposes.
Some cryptocurrency tokens can be used as a blockchain base for games and programming. Others are strictly a fundraising thing, while even more can be used specifically with other sites.
Striking differences between crypto and stocks often deal with the purposes that they sell. It makes sense, since crypto is really nothing other than computer code. Stocks, on the other hand, are paperwork and fundraising motifs.
Before you decide to invest in crypto, take a look to find out what your crypto will be doing. It might be more than just an investment.
The volatility is different.
You know how cryptocurrencies are mostly valued based on their reputation? Well, that makes for a very volatile market with extreme highs and lows.
The crypto market is unpredictable, and prone to sudden currency crashes. In terms of investing behavior, this leads to one of the most striking differences between crypto and stocks.
Stock investors tend to hold their stocks during times of volatility, knowing that things will eventually smooth out. Because crypto is as wildly unpredictable as it is, it's not always wise to HODL for dear life.
As a result, panic-selling is more common, and at times, also more advisable in the crypto scene.
Let's face it—investing in stocks is a must if you want to be able to retire. Crypto? Not so much. The range of demographic use with differences between crypto and stocks can be seen pretty clearly because of this little fact.
Since stock investments are the de facto way people prepare for retirement, people from all walks of life invest in them. You will see plumbers, school teachers, and even teenagers have full stock portfolios.
Cryptocurrency, though, is still a niche investment. Most cryptocurrency owners are overwhelmingly male, in their mid 20s to early 30s, and also happen to be college educated.
Stocks are generally safer from fraud than crypto is.
Stocks are heavily regulated, and most have to go through yearly audits in order to continue to be traded on the market. Because of the heavy scrutiny that comes with making your own stock, it's highly unlikely that the stocks that you invest in will be fraudulent.
Crypto, on the other hand, is very prone to fraud due to its decentralized, unregulated nature. Not only do actual ICOs and cryptocurrencies have the potential of exit scams attached to them, but actual cryptocurrency exchange scandals mean that you could easily lose your portfolio fairly quickly.
A stock exchange trade will not be fraught with the potential for fraud like crypto exchanges are. That alone makes stocks far safer. A good word of advice with crypto would be to proceed with caution.
Speaking of fraud, there's another issue that marks serious differences between crypto and stocks. When you buy a stock, it's issued out in your name, and evidence is out there of your ownership. Because of all the tracking and record-keeping involved in stock trades, people can't really steal shares of stock.
Cryptocurrency, though, is different. It's literally digital currency—and it's very hackable. Moreover, it doesn't show your name tied to any of it. Because of the nature of digital currency, it's easier to steal and hack. Just check out some cryptocurrency scandals you need to know about if you don't believe me.
There have been many cases where successful crypto investors did everything right, amassed millions of dollars, and then found themselves penniless because of a hacker.
With great risk comes great reward.
With all the problems that cryptocurrency has, you would think people would avoid it like the plague. If it had regular returns, that would be the case. However, cryptocurrency doesn't always have "regular" returns like stocks do.
Many people who are very long term investors have seen returns of over 1,000 percent. Even short term ICO returns tend to be around 150 percent. So, the reward is there.
To trade stocks, you can use some investment apps like Stash or Robinhood to initiate a trade. It's pretty straightforward and easy to do. Learning how to trade cryptocurrency, despite being a little more mainstream these days, still remains a lot more complicated.
For most crypto trading outside of Bitcoin or Ethereum, you will need to download a cryptocurrency wallet, transfer cash into Bitcoin or Ethereum, and then buy coins using those two tokens. If you want to cash out, you will need to do multiple trades as well.
Finally, there's also a lot more uncertainty about the future of crypto.
The differences between crypto and stocks are massive, but one of the more obvious is that the stock market has become an institution, and it's one that started to dictate the way entire economies function. With cryptocurrency, there isn't that same amount of institutionalization quite yet.
Sure, major companies are now investing in crypto, but that doesn't mean that it will stick around. Several countries have started to ban its use in favor of legal tender—and others are beginning to follow suit.
Will it work out? Will the crypto market become a new stock exchange? Can the crypto market even recover given recent events? It's hard to tell, but no matter what happens, it's safe to say it's a wild ride.