Cryptocurrency vs. stocks: What’s the better choice for you?

Cryptocurrency’s rapid appreciation has many investors questioning the place of stocks in their portfolios. But there are numerous differences between stocks and cryptocurrencies.

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Cryptocurrency has taken the world by storm, especially during the last few years. The total value of all these digital currencies has swelled to more than $2 trillion, says Bloomberg. Of these, Bitcoin is the most popular, worth more than $1 trillion itself, according to CoinMarketCap.com. Investors have swarmed to this digital gold rush, often with little knowledge and a lot of hope.

Cryptocurrency’s rapid appreciation has many investors questioning the place of stocks in their portfolios. But there are numerous differences between stocks and cryptocurrencies. The most important is that a stock is an ownership interest in a business (backed by the company’s assets and cash flow), whereas cryptocurrency in most cases is not backed by anything at all.

If you’re buying cryptocurrencies, it’s important to understand what you’re purchasing and how they compare to traditional investments such as stocks, which have a solid long-term track record.

Should you invest in cryptocurrency or stocks?

Any savvy investor needs to know exactly what they’re investing in. It’s crucial to weigh the risks and rewards of investing, and what will drive the investment’s success. If they don’t have this kind of information, they can’t make the calculation. In this case, it’s not really investing — it’s much more like gambling.

Here are the key things investors need to know about stocks and cryptocurrency.

Stocks

A stock is a fractional ownership interest in a business. It’s easy to lose sight of this, if you become overwhelmed by the wiggling stock prices — and the potential for profit. As a legal ownership stake in the business, the stock gives shareholders a claim on the assets and cash flow of the business. These back your investment and provide a basis for its valuation.

Why stocks rise and fall: A stock price moves as investors assess the future success of the company. While investors may become overly optimistic about the stock in the short term, the stock price ultimately depends on the company’s ability to grow its profits over the long term. That is, a stock rises in the long term due to the success of the underlying company.

For a stock to be a successful investment, the underlying company must perform well over time.

Suggested read: How to invest in stocks: A step-by-step guide for beginners

Cryptocurrency

Generally, cryptocurrency is backed by no hard assets (specialized stablecoins being an exception), and that’s the case for the most popular crypto coins such as Bitcoin and Ethereum. A cryptocurrency may allow you to perform certain functions, such as sending money to another person or using smart contracts that automatically execute after specific conditions are met.

Why cryptocurrency rises and falls: Because cryptocurrency is not backed by assets or cash flow, the only thing moving crypto prices is speculation driven by sentiment. As sentiment changes, prices shift — sometimes drastically. So cryptocurrency is driven only by the hope that someone will buy it for more in the future — what’s called the “greater fool theory of investing.”

For a cryptocurrency to be a successful investment, you must get someone to buy it from you for more than you paid for it. That is, the market must be more optimistic about it than you are.

Suggested read: How to start investing in cryptocurrency: A guide for beginners

Cryptocurrency and stocks: What to consider

Risks and safety

If you’re thinking about investing in any market-based investment such as cryptocurrency and stocks, you need to carefully consider your risk tolerance. Can you handle the volatility in these kinds of assets? How well do you respond to gains and losses in your investments?

Stocks

Cryptocurrency

As risky as stocks can be, cryptocurrencies are even more speculative.

Time horizon

Your time horizon — when you need the money from an investment — is a key criterion. The shorter your timeline, the safer your asset should be, so that it’s there when you need it. The more volatile an asset, the less suited it is for those with a short timeline. Generally, experts suggest investors in risky assets such as stocks need at least three years to ride out volatility.

Stocks

Cryptocurrency

Portfolio management

As you’re thinking about constructing your portfolio, you don’t have to make an either-or choice between cryptocurrency and stocks — or other kinds of asset such as bonds or funds, either. It’s all about weighting your portfolio in a way that fits your risk and time horizon.

Stocks

Cryptocurrency

The bottom line

Cryptocurrency has soared in price, but investors need to understand what they’re investing in, instead of just rushing in because other traders are. If you decide to take a stake in crypto, consider how it fits with your own risk tolerance and financial needs. Investors can earn good returns without investing in cryptocurrency, and some investors, including legends such as Warren Buffett, won’t touch cryptocurrency.

Last updated on February 3, 2022, and last reviewed by an expert on January 22, 2022.
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