Stocks or Crypto: How to Choose Your Investment Strategy?
How to choose between crypto and stocks for your investment strategy? Below, we outline the key characteristics of each class along with their differences, benefits, and risks.
On this page
- Investing in Crypto: Benefits and Drawbacks
- Benefits of Investing In Crypto
- Drawbacks of Investing in Crypto
- Investing in Stocks: Benefits and Risks
- Benefits of Investing In Stocks
- Drawbacks of Investing in Stocks
- Key Differences Between Crypto and Stocks
- How to Choose Between Crypto and Stocks for Your Investment Strategy?
Investing in Crypto: Benefits and Drawbacks
Since the launch of Bitcoin around 15 years ago, cryptocurrency has grown into a large asset class. Currently, over 12,000 coins and tokens are listed on the analytics platform CoinGecko. Each cryptocurrency operates on blockchain and has its purpose: from serving as an alternative currency for payments to empowering decentralized applications like games and social media. The choice of which cryptocurrency to invest in depends on your goals, but understanding the nature of investments is essential.
Benefits of Investing In Crypto
- Growth potential: Crypto is a highly volatile, relatively new asset class. Investing in crypto can result in high gains as well as losses. It’s worth mentioning that in the 7 last years, Bitcoin has outperformed any major asset class, including gold. However, it’s uncertain how the prices will change.
- Diversity: By adding different types of cryptocurrencies into their portfolio, investors can reduce volatility risks. Those can include NFTs, governance tokens, utility tokens, etc.
- Flexibility: Cryptocurrency platforms operate 24/7 and don't depend on banks. You can make investments whenever you like regardless of your geographical location.
- Independence: Cryptocurrencies aren’t controlled by central banks and governments Independence from central authority makes them a hedge against inflation.
Drawbacks of Investing in Crypto
- High volatility: Crypto prices can skyrocket and fall on a daily basis. Crypto is more volatile than stocks as it largely depends on market sentiments rather than underlying business performance. Crypto investments can bring both massive gains and losses.
- Complex to understand: For beginner and non-technical people it’s difficult to understand the concept of cryptocurrencies. Investing in crypto wisely can take some time to study and understand its nature.
- Regularity uncertainty: As the crypto market lacks clear regulatory rules, there are higher risks of fraud and manipulation. It’s necessary to avoid emotional purchases and large investments out of fear of missing out.
- Technical risks: A part of crypto trading and investments happens on decentralized platforms automated by smart contracts. In the case of smart contract vulnerabilities, there may be hacks leading to loss of funds.
Investing in Stocks: Benefits and Risks
Stocks represent an ownership stake in a publicly traded company and are also known as shares or equities. Prices of stocks depend on the company's performance. Investors can buy shares of businesses across various industries: technology, healthcare, energy, etc. For example, you can invest in NVIDIA, Apple, or other companies if you believe their valuation will grow. Like cryptocurrencies, stocks have their unique characteristics, benefits, and drawbacks.
Benefits of Investing In Stocks
- Established market: The practice of buying company shares has a long history. Therefore, it’s easier for investors to analyze the performance of different stocks before making a decision.
- Linked to business results: One of the key differences between stocks and crypto is that stocks are backed by tangible business results while the values of cryptocurrencies are mainly driven by supply and demand.
- Less volatile: Generally, the prices of stocks are less volatile than the prices of cryptocurrencies. Relative stability is due to the larger trading volumes of stocks. As of March 2024, the total market capitalization of stocks is over $102 trillion, while the total market cap of cryptocurrencies is over $2 trillion.
- Clearer regulatory rules: The stock market is governed by rules and regulations. It provides legal protection for investors and is an attractive option for institutions. Today, it’s also possible to invest in shares issued by companies in the crypto industry, such as Coinbase or MicroStrategy.
Drawbacks of Investing in Stocks
- Lower return potential: Because the stock market is less volatile, it offers lower potential rewards. Stocks are primarily seen as a long-term investment strategy, with the S&P 500 index averaging a yearly return of around 10%. However, returns can vary, and there are high-risk, high-reward options such as startups focused on emerging technologies.
- Risks related to a business: The price of shares depends on various factors within a company, like changes in leadership or reports of declining earnings. These factors can cause a selloff and less demand, which can make the investment's value drop.
- Higher trading fees: Generally, trading stocks involves higher costs. Investors have to pay brokerage commissions and fees for banking services. On the other hand, fees on crypto exchanges are lower.
- More affected by macroeconomic factors: Stocks, as traditional financial assets, are strongly influenced by economic conditions such as interest rates and depreciation of local currencies.
Key Differences Between Crypto and Stocks
Investing in crypto and stocks represent their nuances. Both classes depend on market demand and offer portfolio diversification tools. However, there are key differences between them in terms of structure, regulations, and history.
How to Choose Between Crypto and Stocks for Your Investment Strategy?
Whether to invest in crypto, stocks or both is a personal financial decision depending on your approach to risk and return generation goals. To invest safely, consider the following best practices:
- Take time to research different assets
- Define the amount you are willing to lose
- Avoid FOMO and make rational decisions
- Consider diversifying your portfolio
- Choose between short-term and long-term strategies
When investing in stocks or crypto, take into account that there are no guarantees for returns. Regularly review your strategy and stay informed to increase your chances of returns.
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