7 differences between cryptocurrency and stocks explained
Take a look at how cryptocurrencies are pushing the limits of investing to create a whole new asset class.
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Cryptocurrency's rapid rise in popularity has a lot of investors scrambling to react. The fast-moving crypto market can be difficult to grasp, and even experienced traders have a lot to learn about how this new industry works.
So let us help you to get the most out of your investment and protect your portfolio by going over some of the key differences between cryptocurrencies and stocks.
A major advantage of cryptocurrency ownership is the ability to earn yield on your assets, which are regular rewards paid out for locking up your crypto or depositing it into a special type of savings account. Whereas stocks are simply left on an exchange to fluctuate in price, crypto assets can be put to work to generate passive income.
There are numerous ways to accomplish this, but the most common is via "staking". Staking is locking up your crypto assets in a blockchain network or application. These coins are then used as collateral to provide for economic stability and governance, with additional coins being rewarded to you on a regular basis in return for your participation.
Staking can be done by using a software wallet, running specialised hardware (requires substantial technological know-how) or through an exchange platform like Swyftx that does the hard work for you.
Cryptocurrencies are frequently referred to as "smart money", just ask the CSIRO. Like smartphones, smart TVs and other "smart" appliances, smart money refers to the idea that cryptocurrency can be programmed, used with applications and become part of an entire ecosystem.
Owning cryptocurrency also means you're holding a productive asset that can be put to work in different ways – something that plain old stocks could never do.
For instance, with crypto you can:
- Deposit it into a yield-bearing account to earn regular reward payments that get streamed to your account daily or even by the minute.
- Use it as collateral to take out a cash loan and pay for something like a new car or mortgage deposit without needing to sell off your actual investment.
- Spend it instantly using a mobile wallet or debit card instead of having to cash out and transfer funds to your bank account each time you take profits.
- Send it to anyone, anywhere in the world, any time.
- Use it with specialised financial applications and services, known as decentralised finance (DeFi).
And that's just speaking generally. Most cryptocurrencies have their own function unique to them, such as being used for rewards, in-app payments or access to services.
The point is cryptocurrencies can be used whereas stocks cannot.
Stocks do give you certain privileges. However, they are just far more limited. They entitle you to part ownership of a business which typically comes with voting rights at shareholder meetings. If you're lucky, you will also get dividend payments, depending on the type of stock.
Right now a single Bitcoin will set you back about $60,000, but thankfully with crypto, you don't have to buy a whole coin. Cryptocurrencies are divisible, which means that you can buy, sell, send or spend as much or as little as you like. With exchanges such as Swyftx, you can get started investing with as little as $1, letting you top up your portfolio any time.
Cryptocurrency has long been a source of contention between investors because of its wild fluctuations in price and methods of valuation. Some experts find it difficult to recommend digital coins as a viable investment because cryptocurrency isn't really backed by anything physical. Instead, the worth of cryptocurrency is mostly driven by speculation as investors get to determine how valuable a certain coin's functionality is.
This is a major reason for the wild swings you see making headlines, where the price of a "blue-chip" coin can change by 100% in just a matter of days. Without a physical, easy-to-represent marker of value, the crypto market becomes extremely reactionary.
Conversely, stocks are fractional ownerships in a business, meaning their values are related to an underlying asset. If the business performs well, this can be expected to be reflected in the price of the stock. If the business posts negative returns, the stock will likely fall. Though speculation and news do inform the stock market, the results are not as volatile or punishing as in crypto.
Another advantage of cryptocurrency is that the market is open 24/7.
Just like any other business, stock markets have opening hours, typically between 10am and 4pm, Monday to Friday. Orders can be placed after hours, but prices will not be updated until the market opens again. This can make it difficult to react quickly to news if it happens overnight or over the weekend.
By contrast, cryptocurrency markets are permanently open and active 24/7.
To support this new paradigm, crypto platforms are beginning to lengthen their live customer support hours. Even night owls can get help when they need it.
When cryptocurrency first became popular in the mid-2010s, brokerage platforms would often have complex, week-long verification processes for new investors. This meant you had to wait days or weeks before buying your first crypto assets, potentially losing out on profits as the market swiftly moved.
Nowadays, most popular crypto exchanges have automatic know your customer (KYC) systems in place that can verify accounts within minutes. Many are also compatible with Osko, Poli or other instant transaction methods that let money reach your account within seconds of sending it.
Although newer investment platforms such as Robinhood have similar processes in place, traditional stockbrokers can still take up to a week to verify your account information. On top of this, transferring fiat currency onto a stock brokerage platform can also be a lengthy task. For example, some platforms require the currency to first be exchanged to USD before it can be invested. Not only is this slower, but it also accumulates fees at a rapid rate.
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Though there are positive differences between cryptocurrency and stocks, there's a reason crypto is viewed as a far riskier investment option.
One of the key reasons for this is the regulatory differences between the assets. Stocks have been around forever (conceptually since the 16th century), whereas cryptocurrency is barely a decade old. Stock exchanges are backed by government legislation that protects investors from being exploited or hacked.
Most cryptocurrency exchanges have regulations in place too, but they are nowhere near as thorough as traditional stock institutions and still sit somewhere in a "grey area". Although some investors are proponents of stronger cryptocurrency legislation, it's important to remember that part of cryptocurrency's manifesto is less financial regulation in the first place.
While the financial sovereignty of cryptocurrency investment may be appealing to some, it leaves you in more danger of being hacked or "rugged" due to less regulatory support and increased individual responsibility.
There are still plenty of similarities between cryptocurrency and typical stocks. For the most part, the way you purchase and trade the assets is nearly identical.
Trading options such as market/limit orders, stop/loss orders, margin trading and social trading are all accessible on a few popular cryptocurrency exchanges.
As long as liquidity isn't an issue, trading between cryptocurrencies happens instantly (if using a market order).
But perhaps the biggest similarity is this – both cryptocurrencies and stocks are speculative assets that fluctuate in value. Never invest more than you can afford to lose, do plenty of research before you buy and make sure to use a reputable exchange, preferably one that is locally owned and operated.
Disclosure: The author owns a range of cryptocurrencies at the time of writing
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