Stocks and cryptocurrencies are very different investment assets.
Stocks and cryptocurrencies are very different investment assets. These are very different types of stocks and they belong to very different parts of your portfolio. Here is a summary of these two types of titles.
What are stocks?
Shares represent the ownership of a publicly-traded company. Each share of stock you purchase confers a percentage of ownership in the company itself. You receive this property in proportion to the number of shares issued by a company.
For example, suppose XYZ Corp. If you buy one of these shares, you literally own 1% of XYZ Corp. (although rare, when a company has released more than half of its ownership in the form of shares, it is possible to acquire the company simply by buying enough of its stock.
Investors can make money by selling their shares to other investors. This is known as capital gains, the difference between what you paid for the business and what you get from its sale.
Beyond that, the benefits of owning shares depend entirely on the individual company involved. Shares can also gain value by paying dividends to their investors, through the voting power held by shareholders and other proprietary rights.
What are cryptocurrencies?
A cryptocurrency is a purely digital asset. This means that it has no physical components but exists only as an entry in a registration property of an online ledger. This is, for example, as opposed to the euro which has both a physical component (you can withdraw and hold a one-euro coin in your hand) and a digital component (you can own a euro as nothing more than an entry in your bank account registering such ownership).
The single unit of a cryptocurrency is called a token, in the same way, that the single unit of a stock is called a stock.
Cryptocurrencies come in two main varieties. Some, such as the well-known Bitcoin, are intended as pure currencies. Others, such as Ethereum, are known as "utility tokens". These currencies work
as part of more complex software, although utility tokens are also meant to be bought, sold, and traded.
As of this writing, there are several thousand different cryptocurrencies in circulation.
Key differences
For an investor, there are important differences between investing in cryptocurrency and investing in stocks. However, as a threshold question, it is important to understand that this article is only a brief introduction to the problem. You could write volumes about the nature of cryptocurrencies versus investing in stocks.
We recommend that you go to Finance Italy and other countries, where these topics are explained very well in dozens of in-depth articles.
However, some of the more important differences are:
Diversity
At the time of writing, the combined quotes of the New York Stock Exchange and NASDAQ alone offered more than 6,000 potential companies to invest in. At the same time, various cryptocurrency markets offer between 10,000 and 12,000 potential cryptocurrencies. (This number changes rapidly.)
However, these markets aren't necessarily as diverse as they seem. At any given time between 55% and 70% of the entire cryptocurrency market is tied to Bitcoin. That asset dominates this market in a way not seen on stock exchanges, where nearly any company can be a potentially valuable investment.
That said, equity markets shouldn't be too proud of this distinction. While no title dominates its market, there are similarities in FAANG titles. These five companies (Facebook, Apple, Amazon, Netflix, and Google) make up about a fifth of the entire S&P 500.
It's not the domain of Bitcoin, but investors should be aware of similar market capture dynamics.
Volatility
Cryptocurrency is probably the single most volatile asset you can invest in. This applies to both individual assets and the market in general. Whether you've bought Bitcoin or an altcoin (slang for literally every other asset on the cryptocurrency market), cryptocurrencies are a roller coaster.
Assets can triple in value and then lose everything in a single day. Investors can make a fortune this way, sure, but many others lose their shirts.
Individual stocks almost always have much lower volatility than cryptocurrency, but they are not yet stable. Indeed, until the arrival of cryptocurrencies, the shares of an individual
stocks were generally considered to be the most volatile investments that could be made. However, despite the random change in the value of individual assets, the stock market as a whole tends to be generally stable and predictable. It generally moves slowly, so much so that the big shifts in the stock market as a whole make headlines.
If you want a speculative asset, a single stock is a good choice. If you want an extremely volatile asset, crypto can play that role well.
Source of profit
You can generally profit from stocks in two ways. Second, you can hold the shares and collect dividends if the company behind the shares chooses to make dividend payments.
From time to time a company may repurchase its shares, creating a more guaranteed form of capital gains.
You can reap profits from cryptocurrency only through capital gains. While utility tokens offer a complicated set of software solutions, ultimately any cryptocurrency on the market can only be turned into dollars by selling it to another investor.
(Also, despite nearly 10 years of industry-wide development, as of this writing no utility token has turned its software into a marketable product.)
This makes cryptocurrency a bit more speculative than stocks tend to be. A pure cryptocurrency is ultimately only worth what the next investor is willing to pay for it.
There is no underlying asset that can influence or stabilize this value. This means that cryptocurrencies are only subject to technical analysis. Stocks, on the other hand, have an asset rooted in the shape of the company behind the stock.
This creates room for fundamental analysis of the value of a stock, as you can gauge how much the underlying company is worth regardless of market dynamics.
Trade and regulation
Like all stocks, stocks are some of the most heavily regulated assets you can trade. The SEC closely monitors public shares and does the same for the markets in which those shares are traded.
Investors trade most of the shares on a handful of large centralized exchanges. Almost all stock trading in the United States, for example, is conducted on the New York Stock Exchange and NASDAQ. Any given security will only be listed on one exchange at a time. While you can trade stocks privately, this is relatively rare and is typically only done with unlisted and "penny" stocks.
Cryptocurrencies do not yet have any kind of centralized trading system. Instead, a network of hundreds (if not thousands) of independent companies manages their own little ones
exchanges where individuals trade cryptocurrencies with each other. Although some more popular cryptocurrency exchanges dominate hedging, there are no truly dominant players in this market.
This means that the cryptocurrency is traded between individuals. Unlike the official stock exchange system, where shares are traded through a third party known as a clearinghouse, most, if not all, of the cryptocurrency is traded directly between the buyer and seller. (Note: This may change, as this market changes rapidly.
While many cryptocurrency advocates argue that the technology behind the cryptocurrency has made clearing houses obsolete, this is not true. A clearinghouse acts as an intermediary that brings buyers and sellers together.
This helps establish clear market prices for each asset. The absence of a clearinghouse function in cryptocurrency means that individuals who want to trade currencies have to find themselves ad hoc. It also means that there is no centralized pricing mechanism for cryptocurrency.
Although investors have published market prices as a guide, ultimately the price of any transaction will depend on the market and even the traders involved.
This makes cryptocurrency a generally less liquid asset than stocks. While high-volume cryptocurrencies like Bitcoin and Ethereum don't tend to have this problem, it generally takes longer to trade the thousands of less popular cryptocurrencies, and the prices of those assets tend to be more unpredictable.
Beware of scams !!
Cryptocurrency remains largely an unregulated asset class, as bodies such as the Milan Stock Exchange, the ECB, the US Securities, and Exchange Commission, and IRS specifically decide how to govern it. This has led to an increase in potential assets for investors to explore, which can be great for aggressive portfolios.
However, it also came at a cost. Estimates suggest that around a third of all new cryptocurrencies introduced to the market are fraudulent in some way. Most are traditional pump-and-dump or cash-grabbing schemes for an asset that will never be released.
Investors have also often been fooled by the casual application of existing regulations in this market. It has become common for popular rumors in the cryptocurrency community to swing the price of individual assets with a single tweet or post on Reddit.
This type of behavior occurs relatively infrequently on the stock market, as doing so with a regulated asset is a criminal offense.
Final remarks
So which asset should you invest in? Cryptocurrency is a very interesting asset, in full expansion, and which has attracted enormous interest in a short time. If this does you
interest, invest only with the most speculative segment of your portfolio, money that you are comfortable with losing. Individual stocks are linked to the performance of an underlying company, which determines the stock's price. These are still volatile and risky assets, but not to the same extent as cryptocurrencies.
Investors looking for a mix of growth and risk management should consider ETFs (or stock market index funds). These are not subject to the same gains as cryptocurrencies or stocks, but they are not exposed to the same risks either.
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