You’ve undoubtedly seen the headlines covering cryptocurrencies as they soar to highs or violently crash to lows. Hardly a day goes by without some news about cryptocurrency as celebrities, athletes, actors and influencers have become tangled in the fray. While they have become mainstream as a topic, many still don’t understand the risks involved with crypto. Crypto is often mentioned in the same spotlight as stocks as a new asset class worthy of speculation and investment.
So, crypto vs stocks? Many view them as similar investments, but nothing could be further from the truth. In this article, you will learn the difference between crypto and stocks to help you make informed decisions.
Cryptocurrency: An Overview
Cryptocurrency is a digital asset with no intrinsic value other than what someone else is willing to pay. There is nothing physical about cryptocurrency. It’s hardly even a currency in the traditional sense of being able to buy tangible goods and services consistently. Cryptocurrency uses encryption techniques to verify and track all its transactions in a decentralized manner on the blockchain. Bitcoin is synonymous with cryptocurrency, or “crypto” for short. It has been around since January 3, 2009, and broke through the $1 mark in 2011. It hit mainstream once it started skyrocketing toward its all-time high near $68,789 in November 2021.
Bitcoin is the most popular and recognized crypto of over 21,000 cryptos. Most cryptos are “dead,” with no trading volume or liquidity, while over 9,000 have a heartbeat with an estimated 300 million crypto users worldwide. Cryptos have a theme or alternate technological function like Ethereum, which powers the Ether token, the second most widely used crypto, with smart contracts that are embedded instructions within each block used to create apps, communications or transactions. It pays to know what cryptocurrencies are and how to invest.
Stocks: An Overview
Stocks are tangible assets representing ownership and voting rights in the underlying company. They are listed and traded through regulated exchanges. The value of a stock rises and falls based on supply and demand linked to the performance and valuation of the underlying company. A stock’s value represents the company’s future performance. Stocks regularly report their performance in a quarterly earnings report filed with the United States Securities and Exchange Commission (SEC), released four times a year. Investors use this information to determine their investments in particular stocks. Stocks are regulated by individual exchanges, the Financial Industry Regulatory Authority (FINRA) and the SEC.
10 Differences Between Crypto and Stocks
You can use both crypto and stocks as investments. They have very stark differences. Here are nine differences when it comes to investing in crypto vs stocks.
No Intrinsic Value
The valuation of crypto doesn’t peg to any underlying financial performance metric like stocks. A stock’s valuation is often justified by its performance or perceived future performance as an operating entity seeking to grow and improve its business and value for its shareholders. You can use standard financial metrics like price-to-earnings (P/E), price-to-book (P/B) and enterprise value (EV) to calculate and justify the valuation. Underlying businesses reveal their quarterly revenues and income to gauge the underlying company’s performance. Crypto has none of that. News, rumors, regulation and sympathy show value and supply and demand.
Not Yet Regulated
While the lack of regulation is appealing to many crypto owners as a way to “stick it to the man,” it can also present opportunities for fraudsters, scammers, thieves and hackers to steal your money with little to no recourse. Regulation is a double-edged sword, but it helps gain the public’s confidence in a product or service. Governments and various financial agencies around the world pursue crypto regulation. It’s a matter of when, not if, regulation will happen.
One of the arguments for crypto having value is the limited nature of its tokens. For example, Bitcoin is designed only to have 21 million bitcoins issued. However, that doesn’t consider the infinite times it can divide in half. Bitcoin is the most liquid, but most 21,000 cryptos have no liquidity as they have no trading volume. There are over 6,000 stocks, and the exchanges, FINRA and the SEC regulate them.
Can Experience Losses
Bitcoin owners can lose their cryptocurrencies. Owners who use cold storage or misplaced passwords can lose the encryption forever. Officials can track every transaction to a digital wallet but may not be able to identify the wallet’s owner quickly enough before it gets cashed out. There is very little recourse if either of these happens.
Most stock investors don’t hold onto physical stock certificates, so stocks rarely get stolen since most investors don’t hold onto the physical stock certificates. The SIPC insures brokerage accounts that get hacked for up to $500,000 in cash. Officials can track transferred stocks to the culprit’s account. The Depository Trust Company (DTC) electronically settles, follows and holds them in custody.
Crypto uses blockchain technology, enabling it also to have programmability to serve a function or utility while maintaining a value. Stocks don’t perform any function other than providing voting rights to shareholders for specific events.
Can Use as Payments
While not widely used as a payment source, some people and businesses accept crypto as a form of payment for products and services. You might use crypto to purchase some pizza or a coffee, but you can’t use stock unless you sell it first and use the cash.
Treated as Property by the IRS
Stocks are taxed based on long-term and short-term capital gains. The IRS taxes crypto as ordinary income from its market value on the date of receipt and when it’s sold or exchanged (if it has appreciated in value). It gets complicated when you use it to pay for goods, property or services.
If you purchase a TV with crypto, you have to calculate the net profit between the price of the crypto and the TV price. If the crypto value appreciates before purchasing the TV, you must claim the appreciation as income for tax purposes. You must claim the sale as gross income if you own a business. If you are a crypto miner, you must claim the gain on the date you mined the crypto.
No Licensing Requirements
Stocks trade on regulated exchanges through a licensed broker. The registered broker must attain a license through FINRA to be an intermediary or a firm that facilitates the transaction. The licensing enables the broker to place trades for its customers on the exchanges. Brokers can facilitate the trade through a crypto exchange or directly on a crypto exchange without a license. Advanced traders tend to prefer trading directly on an exchange, while beginners tend to use a broker.
While the more mainstream crypto like Bitcoin and Ether tend to have more liquidity and manageable volatility, the lesser-known tokens can fluctuate wildly. A single one-day 10% move for a liquid stock in the S&P 500 is rare but common with crypto, especially among the lesser-known and more obscure tokens. These are susceptible to “flash crashes” more frequently than stocks. Some of the most popular penny stocks also tend to have significant volatility.
Stocks usually carry no commissions when buying or selling. Crypto trades can incur a fee and a commission based on a percentage of the value of the transaction. Commission-free crypto trades can have a more significant bid and ask spread that an exchange or broker factors a commission into, which is common practice with forex brokers.
Pros and Cons of Investing in Crypto
Why would anyone invest in crypto if there’s no intrinsic value?
Would you invest $5 into something that will be $50? Likely yes, no matter what it may be, whether tulips or Beanie Babies. Investing involves parking your money somewhere it can passively appreciate. However, you also risk losing value. Here are the pros and cons when deciding to invest in crypto.
Benefits of investing in crypto include:
- Trading hours: You can trade crypto 24 hours a day, seven days a week. You will not encounter “market hours” like the stock market, which only trades Monday through Friday from 9:30 a.m. Eastern Standard Time (EST) to 4:30 a.m. EST.
- No PDT Rule: This rule applies to trading stocks and options but not crypto. The rule limits trading to a maximum of three round trips on a rolling five business-day basis, unless the trader has a minimum of $25,000 capital in the account. Round trips are a buy and sell of the same stock performed within a single day. Anyone who executes more than three round trips is classified as a pattern day trader (PDT) and must have a minimum of $25,000 in the account or face a 90-day suspension.
- Global access: Since crypto trades 24 hours a day, seven days a week, you can trade it anytime, anywhere in the world with an internet connection, instead of waiting for the market to open.
- No insider information: Since crypto is not regulated nor pegged to a company’s performance like stocks, you won’t get inside information about whether it’s a good buy or not.
These are the potential downsides of investing in crypto:
- Volatility: The lack of market makers means that crypto can have very volatile price swings and even flash crashes.
- Can be lost or stolen: Crooks can lose, hack and steal crypto with little to no recourse for the offender.
- Can fall without news: When stocks fall, there is often some kind of news to explain the reason for the fall. Crypto can fall for any reason since it isn’t tied to the performance of a company like a stock. It can fall in sympathy with other crypto tokens for any reason.
- Can’t hedge: Hedging means to buy one asset and short sell a similar asset to form a net neutral position. It’s often used by portfolio managers to protect long positions. Unlike stocks which you can hedge with options, index futures and even the S&P 500 to minimize losses, you can’t hedge with crypto properly because most have no futures contracts options.
- No regulation to protect investors: There are no specifically assigned regulators that monitor trading, police the markets and penalize rule-breakers like the SEC or FINRA does for the stock market.
- Less liquidity: Without market makers and institutions involved, the bid and ask spread can get wide. This means you will pay more to buy crypto and get less when you sell. In the stock market, market makers provide liquidity to narrow spreads which helps investors get better prices.
- Longer transaction times: Trades can take up to 15 minutes to execute.
- Pricey commissions: Crypto trades have expensive commissions that can include a percentage and fee.
Pros and Cons of Investing in Stocks
While the stock market has been around for over a century, stocks also have pros and cons to weigh before investing.
The benefits of investing in stocks include:
- Intrinsic value: Stocks represent a piece of ownership in a business. These business operations have real assets like cash, property, equipment, inventory and intellectual property. These are tangible assets with real value and all factor into the price of a stock.
- Long-term investing: The history of the stock market underscores the success of long-term investing. The 30-year average return for the S&P 500 index is 9.9%. The crypto market is too young to gauge how long-term investing would play out since bitcoin has only been around since 2009.
- Regulators: The SEC and FINRA protect investors from unscrupulous company and broker practices. They keep the stock market on an even playing field.
- Can hedge: Portfolio managers to individual investors can hedge their long positions by taking the opposite direction in a positively correlating instrument. They can do this with bearish ETFs that short-sell the market and rise in value when the market values or with put options contracts that also rise in value when a stock price falls.
- More liquidity and less slippage: Since market makers compete to offer the best prices for you to buy and sell stocks, it naturally creates tighter bid and ask spreads, often as tight as $0.01. This means you can buy stock XYZ on the ask for $27.01 and then sell it on the bid at $27. The $0.01 difference between the bid and ask is called the spread. It is also considered slippage because of the additional costs you incur when selling your position. When there are less market makers and participants competing for price, there is less liquidity. In this example, the bid and ask spread could be much wider, like $26.50 x $27.25. This means you would have to pay $27.25 to buy the stock and sell at $26.50 if you want to sell the stock, resulting in a (-$0.75) per share loss or slippage. Widely traded stocks in the S&P 500 index have the most liquidity and least slippage.
- Fast execution speeds: It literally takes seconds to buy or sell a stock.
- Commission free: Most brokers offer commission free or $0 commission trades on stock transactions. This means you don’t incur additional fees to buy and sell your stock.
Let’s also take a look at the cons of investing in stocks:
- Stocks can lose money: As with any investment, you can always lose money. Stock prices can rise and fall. Stocks are not FDIC insured like bank accounts, so you can always lose money if your stock prices fall below what you paid for them.
- Stocks can stop trading: A stock can stop trading if there is material news that the company has to release that could result in panic selling or buying. A trading halt can last from minutes to hours. However, these halts can result in reopening at much lower prices as market makers attempt to match up large buy and sell orders. A large sell imbalance means prices would have to drop to a point where buyers feel it’s too good to pass up. This can result in a lower price when trading resumes upon reopening. Stocks can also halt on good news and reopen higher, such as if a company is acquired at a higher price.
- Limited trading hours: Regular stock market hours are from 9:30 a.m. EST to 4 p.m. EST, Monday through Friday. Pre-market trading can start at 8 a.m. EST to 9:29 a.m. EST, depending on the broker. Post-market trading occurs from 4:01 p.m. EST to 8 p.m. EST.
- International time zones: Unlike crypto, which you can trade at any hour, international traders will have to wake up extra early or stay up extra late to participate in the U.S. stock market during its operating hours.
- PDT Rule for day traders: Without having at least $25,000 in your account, you can only make three round trips on a rolling five-business-day basis. This regulation was enacted in 2001 after many investors got burned in the internet bubble stock market collapse. It protects small investors from overtrading and churning their account down to ashes.
- Uneven playing field: Since stocks peg to the performance of their underlying companies, inside information can fall into the wrong hands, providing an unfair advantage. Someone may also know something more about a company that the public is not privy to, but acting on that information is illegal in certain cases.
Other Considerations: Crypto vs Stocks
While it’s easy to speak about crypto vs stocks in the same sentence, they are both risky instruments that can also lose money. They may move for different reasons, but both crypto and stocks follow trend patterns. Research your crypto or stocks before investing and always use risk capital only. This is money that you don’t need immediately in order to survive. It’s also important to keep a stop-loss, which is a price level where you throw in the towel to avoid larger losses.
Consider the Pros and Cons of Crypto and Stocks
Investing doesn’t necessarily have to limit you to stock market vs crypto or stocks vs crypto. They can coexist in a balanced investment portfolio if you know and accept the risks involved. You can limit risk with proper allocation or weighting your portfolio.
As a rule of thumb, the riskiest assets should have the smallest percentage of your capital allocation. For those who want more liquidity and less volatility, it pays to learn how to know which cryptocurrency to buy, how to buy cryptocurrency stock and how to buy crypto stock on the stock exchanges through ETFs and tracking stocks first. Here are some bitcoin stocks to consider. For stocks, it pays to understand stock screening for investors.
Here are some frequently asked questions about crypto vs stocks.
Do cryptocurrencies and stocks work the same?
Yes and no. Both have prices that move on supply and demand, but stocks are pegged to actual performance while crypto moves on sentiment and speculation. Stocks have institutional buyers that can stabilize price and volatility, while crypto has very little institutional presence.
Is crypto a better investment than stocks?
No. Crypto is relatively new compared to the stock market, which is over a century old and fortified with regulations to protect investors. Crypto is still in its infancy compared to the stock market, and with looming rules, it’s hard to predict the industry’s future.
Which is riskier, crypto or stocks?
Does cryptocurrency vs stocks present the most risk? The lack of regulation and intrinsic value makes crypto much riskier than stocks. Stocks have more transparency (such as why they make a certain price move) because it’s usually associated with the overall market climate or company-specific news.
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