Cryptocurrency vs. Stocks: Understanding the Difference
November 18, 2021
A sound investment portfolio should contain a diverse mix of assets. Putting money in different kinds of investments, such as stocks, bonds, real estate, and commodities, spreads risk.
There’s even room for more speculative investments. In the 20th century, it might have been wildcatters drilling for oil (and not always finding it). In the 1990s, it might have been internet stocks. Today, it’s cryptocurrency (also known as crypto).
In considering cryptocurrency vs. stocks, investors must balance comfort and risk. Investors in digital currencies have had to live with wild swings in value. The roller-coaster ride of stock value can be dizzying, but not quite as wild as crypto’s ups and downs.
Understanding the strengths and weaknesses of each asset and the role they play in a portfolio is necessary to meet the investor’s goals.
What is cryptocurrency?
Cryptocurrency is a relatively new medium of exchange that’s gained popularity in the past decade. Crypto cheerleaders think the future of finance is cryptocurrency rather than stocks and conventional forms of currency, while others believe that the unregulated nature of cryptocurrency makes it too risky to support a full-fledged financial system. Cryptocurrencies lack government backing, and how much the market will bear determines their value.
Cryptocurrencies are maintained on decentralized networks of computers spread around the world. Strong cryptography provides security to transactions and storage, hence the term “cryptocurrency.” A cryptocurrency owner must use a password of at least 16 characters to gain access. (Some crypto owners have been locked out of their portfolios because they forgot their passwords.)
While thousands of cryptocurrencies exist, Bitcoin was the first and remains the most widely held, accounting for nearly two-thirds of the market capitalization of cryptocurrencies in 2020. Other well-known cryptocurrencies are Ethereum, Litecoin, PeerCoin, Namecoin, Cardano, and EOS.
Ups and downs
Volatility has been a hallmark of cryptocurrencies, with sharp changes in value in short periods. In 2021, the value of a single Bitcoin ranged from $28,383 to more than $65,000.
Advocates say that cryptocurrencies, particularly Bitcoin, are resistant to inflation. Bitcoin has a limit of 21 million coins that can be created, leading to a scarcity of supply. That should put a brake on the inflation that can occur with government-backed currencies.
Cryptocurrencies are increasingly accepted as currency. More and more businesses take crypto as payment, and financial transaction platform Square facilitates crypto transactions. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender.
Cryptocurrency relies on blockchain: a distributed ledger technology that tracks and logs crypto transactions. Blockchain combines cryptography, a decentralized network of computers, and the common agreement of users to track transactions. Data from each transaction is kept in a block that connects to those before and after it in a chain that near-tamperproof cryptography protects. Consensus built into the chain validates the transactions.
Some say the real value of cryptocurrency lies in the underlying blockchain technology. A number of businesses have adopted blockchain technology for recording transactions made with conventional currencies as a way to increase trust and prevent fraud and money laundering.
With Bitcoin prices reaching more than $60,000 a coin, it might seem more expensive to buy cryptocurrency rather than stock. However, investors can buy fractional shares of Bitcoin for smaller amounts. Other vehicles are cryptocurrency funds that unregulated entities operate.
Cryptocurrency achieved a legitimacy milestone as an investment vehicle in 2021 when the Securities and Exchange Commission (SEC) authorized the trading of an exchange-traded fund (ETF) related to Bitcoin. The ETF tracks the price of Bitcoin futures traded on the Chicago Mercantile Exchange, not the direct value of Bitcoin. The authorization allows brokerage firms to enter the crypto world with the blessing of U.S. regulators.
Stocks at a glance
In considering cryptocurrency vs. stocks, remember that stock conveys ownership of a piece of a company. A company’s founder fully owns the company at its inception. As the company seeks to grow, the founder can sell ownership shares to investors. At some point, the company might want to sell shares to more investors in a public offering. This enables the company to raise more money and for early investors to realize a return on their investment.
Even when publicly traded, a company can sell more stock. The issuance of new stock dilutes the value of the current shares, but enables the company to raise money. Common reasons for selling additional stock are to raise capital for expansion, hire employees, increase production capacity, and build facilities.
Owners of stock can vote to elect members of the board of directors and on corporate policies presented at annual stockholder meetings. They generally have little say in how a company runs from day to day, but if enough investors team up, they can have an impact on the company’s direction.
Investors benefit when the value of the stock rises, which can be due to the company’s performance. The more sales and profits a company makes, the higher its stock should rise. Even the prospect of better corporate performance can boost a stock’s price.
On the other hand, the investment loses value when the stock price drops due to poor corporate performance or economic conditions.
Investors also get value from their investment if the company pays dividends. A company might begin paying dividends if its directors feel profits can be shared or reduce or stop paying dividends if the company needs to invest more money in the business. Made quarterly, dividends paid per share enable a company to share its profits with investors. Generally, older, more established companies with steady income streams are more likely to pay dividends. Younger, fast-growing companies might not pay dividends, preferring to invest profits back into the company.
Classes of stock
Stock owners may hold preferred or common stock. Preferred shares earn their name by giving stockholders preferential treatment in some cases. For example, holders of preferred shares get their dividends first and at a higher payment rate. In case of a company liquidation, they gain payouts ahead of holders of common shares. Holders of preferred shares, however, don’t have the voting right that holders of common shares have.
When buying, investors have a choice of whether to buy common or preferred shares, depending on their investment goals.
Cryptocurrency vs. stocks: The core differences
Cryptocurrency and stocks are valid investment choices, but they serve different purposes in a portfolio. Stark differences exist in how they’re bought and sold as well as how they serve an investment strategy. Here’s a look at key characteristics of crypto and stocks:
To buy and keep stock, a buyer usually has to open an account at a brokerage such as Charles Schwab, TD Waterhouse, or Fidelity. The brokerage makes trades and holds stock in the buyer’s name. Newer firms like Robinhood have streamlined the process, but their offerings aren’t as robust. A buyer also has to disclose personal information, such as their Social Security number and street address. Going through a brokerage provides a level of security.
One of the perceived benefits of crypto is its anonymity. No one needs to know who the crypto buyer is. A crypto owner holds assets in a virtual wallet or on a storage device, such as a USB drive. The downside of anonymity is that responsibility for security falls on the owner, who has to keep track of where the crypto is and remember a password of at least 16 characters. Owners have little recourse if hackers clean out their crypto wallets.
Stocks are traded on accredited exchanges throughout the world. They offer stock buyers security, stability, and transparency and are built to handle large trading volumes every day. Exchanges are strictly regulated (although specifics vary by country), providing protections to buyers and sellers.
Exchanges for buying and selling cryptocurrency are newer. Dozens, if not scores, of crypto exchanges exist. Two of the largest are Binance and Coinbase. Some exchanges work with third parties to smoothly exchange conventional currencies, such as the U.S. dollar, for crypto.
Sudden and rapid changes in stock values are as old as stock exchanges. A piece of good news can launch a stock higher, just as bad news can send it lower. As the terms “Black Friday” and “Black Monday” attest, stock markets can plunge in a day. Usually, there’s an explanation, either economic or technical (such as a program-driven sell-off). Investors might see the value of their portfolios tumble, but total losses are rare.
One thing cryptocurrencies have been known for is their volatility. Ethereum, for example, started 2021 at about $730 and rose to $4,080 at the end of May. It dropped to about $1,786 in July, before rising to $4,082 in late October.
After the stock market crash of 1929 unleashed the Great Depression, the U.S. created the Securities and Exchange Commission (SEC) to devise and enforce investor protections. Companies are required to disclose all information that can have an impact on their stock value. Investors and their financial advisors have a good deal of information on which to base their investment decisions.
By contrast, cryptocurrencies remain largely unregulated, which, for some crypto investors, is a mark in crypto’s favor. Crypto markets know no borders and are beholden to no governments. However, it leaves crypto buyers with no protection if something goes wrong with their investment.
Cryptocurrency and stocks have some similarities as well as major differences. Investment professionals who recognize the strengths and weaknesses of each can use them in the same portfolio for different reasons.
Stocks provide stability. They’ve been the go-to investment to build wealth for individuals and organizations for most of the 20th century and into the 21st century.
Cryptocurrency is the riskier investment. It offers the chance for big rewards, but at higher risk.
Together, they can help balance reward and risk in an investment portfolio.
The future of investing is now
Investing isn’t an either-or proposition. It pays to have diverse investments that balance safer bets with investments that bear a greater chance of loss. By the same token, investors don’t have to decide between cryptocurrency vs. stocks — they can pursue both cryptocurrency and stocks, as long as they’re comfortable with an element of risk in their portfolio.
If you’re considering a profession or even a hobby in investment, learning more about Maryville University’s online Bachelor of Science in Finance program can be a first step in gaining solid knowledge of investment techniques and portfolio management. The program provides a thorough grounding in the basics of financial services that can lead to a rewarding career.