Cryptocurrency vs. stocks: what’s the difference?

The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.

Say you have some available money that you’re looking to invest and grow. What do you do with it? Do you pick out an assortment of stocks or shares? Or do you take a leap into the future and buy cryptocurrency, cryptography-secured digital currencies such as Bitcoin or Ethereum? Or is a hybrid approach where you invest in a combination of crypto and stocks your best bet? We discuss the pros and cons of putting your money into crypto versus stocks and share some ways to figure out which approach might work best for you.

In the simplest possible terms, cryptocurrencies are digital currencies based on blockchain technology. The term “crypto” comes from the cryptographic techniques used to verify transactions. These techniques replace the need for one central intermediary, such as a bank, which proponents see as a major benefit of crypto.

Crypto prices are also known for their volatility, which carries the risk of significant losses or potential for significant gains. If you’re interested in taking the plunge, you’ll certainly benefit from learning the basics to make the most of your investment.

Before you get into crypto, you’ll want to decide where to put your money. There are thousands of cryptocurrencies out there, and this list continues to grow each day—but there are some that are better known than others. They include:

• Bitcoin
• Ether (Etherium)
• Tether
• Solano
• Dogecoin

A stock, also known as a share, represents ownership of a fraction of a company. In many cases, the holder of the stock is often entitled to a corresponding share of the company’s profits in the form of a dividend. Stocks are primarily bought and sold, or “traded”, on stock exchanges, such as the London Stock Exchange or the New York Stock Exchange.

For many investors, stocks have long been an appealing investment—when a given company does well, so do the people who have invested in it. If the value of their investment increases they have the option of selling it at a profit. Of course, companies don’t always do well, so investors run the risk that their investment can go down in value as well.

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So, what are the major differences between cryptocurrencies and stocks? And what do these differences mean for you, as someone trying to make the most out of their money?

Stocks and stock exchanges have a long, distinguished history—the first stock exchange, the Amsterdam Stock Exchange, was set up as far back as 1611. The heavyweights of the London Stock Exchange and the New York Stock Exchange followed in 1698 and 1792, respectively, shaping the world of finance as we know it today., Since then, stock exchanges have established themselves as a pillar of our financial system. The London Stock Exchange alone has close to a million transactions a day, and the New York Stock Exchange experiences 2.4 billion shares change hands daily. For investors, stocks have generally offered reasonably consistent returns—although investments can fluctuate up and down. For instance, the average annual stock market return was 13.9% for the S&P 500 Index from 2011 through 2020.

Unlike stocks, crypto is very much the new kid on the block, having been around since just 2009. Starting with the publication of Satoshi Nakamoto’s white paper on Bitcoin in 2008, cryptocurrencies have sky-rocketed in terms of both public awareness and interest. In 2020/2021, Bitcoin saw between 300,000 and 400,000 transactions daily, with Ethereum (Ether) even hitting more than a million transactions per day in July 2021. 

The term volatility refers to the extent to which an asset’s price fluctuates over time. Highly volatile assets can experience big price swings (both upward and downward), whereas less volatile assets are likely to show more stability. So, what’s the difference between crypto and stocks in terms of volatility?

Generally speaking, the uncertainty about the future value of cryptocurrencies and the fact that they're often not backed by physical assets means that they’re usually considered more volatile than stocks. And since the crypto market contains a number of crypto whales, people or companies who hold a very large amount of a particular coin, these become more vulnerable to investors’ actions. Keep in mind, though, that even investments that are considered less volatile, like stocks, can experience unexpected periods of volatility. 

Most stock markets around the world are subject to governmental oversight.Administrative bodies, such as the Securities and Exchange Commission (SEC) in the US, have wide-reaching powers to investigate and punish any wrongdoing. These protect both investors and the market at large, ensuring, as the SEC puts it, that “people who seek your investment dollars must tell you the truth about their businesses” and “people who sell securities must treat you fairly and honestly, putting your interests first”. And they’re not shy about cracking down on wrong-doers, either—with one of the SEC’s heaviest fines to date being US$13 billion levied against JP Morgan Chase for its role in the recent financial crisis.

Unlike stocks, the crypto market can be a bit of a Wild West: It’s a system that prides itself on its decentralized, unregulated nature, so it’s hardly subject to the same levels of regulatory oversight. Governments are currently grappling with the issue of aligning cryptocurrencies with their existing financial systems. The Chinese government, for example, recently banned all trading and speculation in cryptocurrencies (or “virtual currencies”), and even the IMF is calling for extensive, far-reaching regulation of crypto to protect investors from the volatility of the market.

Cryptocurrency markets are evolving and growing at a rapid pace—and this, combined with their largely unregulated nature, means that they are a hotbed for scams of all kinds. These scams often revolve around attempts to obtain people’s personal data, such as the codes required to access an individual’s crypto holdings, or attempts to have investors transfer crypto to scam artists who might be impersonating legitimate entities. The US alone had more than 80,000 reports of crime involving cryptocurrencies in 2021.

Stocks aren’t immune from scams and security risks either. One of the most well-known stock scams is the pump and dump, where a stock’s price is artificially inflated by highly exaggerated statements encouraging investors to buy, before the orchestrators of the scheme sell their holdings at a much higher price. There are all kinds of other stock scams, too. Remember Bernie Madoff? His ponzi scheme duped investors out of an estimated $50 billion back in the early 2000s.

If you choose to invest in stocks over crypto, you can select from companies in practically every sector and every country in the world. You can be a shareholder in the Japanese automobile industry or in US-based tech companies, and everything in between. This allows you to put together a highly diverse portfolio that isn’t fully dependent on particular industries or geographical markets. In turn, this can help reduce your risk of losing everything.

While there are many different types of cryptocurrencies (more than 16,000 as of January 2022, according to coinmarketcap.com) and various kinds of crypto assets, such as NFTs to choose from, there are fewer options to diversify with crypto than with stocks. While you can reduce risk by making sure you don’t buy just one type of crypto coin, there’s really no easy way to fully diversify your investments. This leaves you in a more risky position if you put all your money in one type of coin, or in a small handful of them.

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So, is crypto better than stocks? Not necessarily. Depending on your risk tolerance, you could consider investing in both. Adding crypto to your stock portfolio can be a great way to add some valuable diversification and open the door to potentially lucrative returns—without leaving yourself fully vulnerable to the risks of either investment. Before you invest any money, consider the following:

• How much can you afford to lose? A well-hedged stock portfolio can sometimes offer a more stable home for your money than crypto investments.
• How much are you hoping to make? Stocks can generally offer more stable returns, but crypto can potentially offer higher gains.
• What’s your timeline? Crypto’s price fluctuations might help you make money much more quickly than the stock market’s longer horizons, but can also lead to significant short-term losses.

When it comes to cryptocurrency, education is key. Should you decide to put some of your money in crypto, there are a few extra things you’ll want to consider. Take some time to read about crypto wallets to figure out which options may best suit your needs, and perhaps you might even want to learn about mining cryptocurrency to understand the mechanisms that bring new coins into circulation.