Over the last few years, cryptocurrency has taken the world by storm. Investors have flocked to this new asset class hoping to capitalize on its volatility and ride positive trends.
With a global market cap of $2 trillion, crypto promises to revolutionize global finance, while stocks remain a cornerstone of traditional investment portfolios. But how do they truly compare, and can they coexist in a balanced portfolio?
In this article, we explore the key differences and similarities between cryptocurrencies and stocks to help you make more informed investment decisions.
What is the difference between crypto and stocks?
- Ownership and Purpose: Stocks and cryptocurrency remain fundamentally different. Stocks, or shares, represent ownership in a company, while cryptocurrencies are digital currencies that allow individuals to make payments directly to each other through the blockchain.
- Types of Cryptocurrencies: Many cryptocurrencies were designed to be transactional, meant to be used as a medium of exchange and value across environments. Others (security tokens) represented ownership of an asset, and others (governance tokens) represented voting rights on a blockchain’s projects.
- Types of Stocks: Stocks, on the other hand, are used primarily to give investors partial ownership over a company which raises money for an organization’s operations. Companies can use this money to grow and expand their business.
- Price Valuation: Another key difference lies in how crypto and stock prices are valued. While stocks are valued based on company performance, cryptocurrency value is based on a combination of supply, demand, and regulatory developments.
Key Similarities Between Crypto and Stocks
Here are three key similarities between crypto and stocks
1.) Price Volatility
While many think cryptocurrencies are inherently more volatile than all stocks, statistics have shown that that isn’t necessarily the case. A research done by Fidelity Digital Assets has found that while Bitcoin is volatile, it is currently less volatile than 33 S&P 500 stocks, many of which are popular mega-cap stocks.
While Bitcoin as an asset class is more volatile than many top-quality indices, there are specific popular individual securities that are objectively more volatile than Bitcoin. An example provided by Fidelity was Netflix.
From January to March 2024, Bitcoin has proven less volatile than Netflix: Bitcoin's realized volatility was 46%, while Netflix’s volatility during the same period was 53%.
“When compared to the “Magnificent Seven”, a group of high-performing and influential stocks, Bitcoin’s volatility does not appear as an outlier.” writes Zack Wainwright from Fidelity Digital Assets.
2.) Diversification
Investors can use both cryptocurrency and stocks to diversify their investment portfolio. A combination of asset classes between crypto and stocks can be great for an investors overall portfolio specifically because the two show weak correlation.
Diversifying across both asset classes can provide a hedge against market downturns since crypto and stocks often have a weak correlation.
Various sectors and markets are available for investment within the two asset classes. Technology, healthcare, and finance are just some examples of sectors within the stock market, while altcoins, stablecoins, and memecoins are other sector options for crypto investors. This allows investors to balance their portfolios even if they choose to remain within one class.
3.) Scams
Both stocks and cryptocurrencies can suffer from fraudulent behavior. Scams are prevalent in both asset classes. A pump-and-dump scam, for example, can be performed in meme coins and penny stocks, where fraudulent parties can inflate prices through endorsements and advertisements.
Key Differences Between Crypto and Stocks
Despite these similarities, we’ve identified three key differences between crypto and stocks:
1.) Regulation Differences
Equities or stocks are generally under the jurisdiction of the country of origin's regulators. The exchange that an equity is traded also provides some level of oversight over these companies.
On the other hand, the regulatory environment for crypto across countries only continues to evolve. While other countries have embraced and adopted crypto as legal tender (like El Salvador), others will have imposed strict regulations (like China). Continuous work is needed from regulators to develop frameworks that address concerns like consumer protection.
2.) Supply Mechanisms
Many cryptocurrencies have a fixed maximum supply. Bitcoin, for example, has a maximum supply of 21 million coins. Stocks can issue more shares or buy back shares, affecting their supply and potentially their market price.
3.) Technology Infrastructure
Stocks use a traditional financial infrastructure to trade, process, and clear transactions. Cryptocurrencies use the blockchain and decentralized network to reach a consensus on the execution of transactions.
Smart contracts also provide an added layer of innovation, where agreements can be directly written into the code and seamlessly executed when conditions are met.
Should You Invest in Stocks or Crypto?
Choosing to invest in one asset class over another is a personal choice, there is no right answer. Perhaps, even ideally, your portfolio would have exposure to both.
When deciding whether to invest in stocks or crypto, and your asset allocation, consider factors such as risk tolerance, investment horizon, and liquidity needs.
Risk Tolerance: cryptocurrencies are generally considered riskier than stocks due to their lack of regulatory oversight. While we’ve shown in previous sections that this isn’t always the case, risk tolerance remains a top consideration when deciding to invest in crypto or stocks.
Investment Horizon: stocks are traditionally a longer term investment than crypto. Compounding and the historical trend of stock market appreciation has made stocks suitable for those looking to grow wealth over a longer term. Because crypto is still in its relatively early stages, it presents opportunities for both short-term and long-term traders. There’s a place for both short-term traders looking to capitalize on frequent price swings and longer-term investors who believe in the technology’s future.
Liquidity and Accessibility: the crypt market trades 24/7 while providing global access to anyone with an internet connection. Stocks are typically traded during market-specific hours and often require more documents to receive approved accounts.
Overall, a balanced approach may be the most prudent option for most investors.
Getting Started with Crypto
For those new to cryptocurrency, navigating thousands of options on exchanges can be daunting. Some platforms, like Peccala, offer managed crypto investment funds that can provide diversified exposure without requiring extensive knowledge or experience.
Peccala aims to simplify crypto investment by holding your hand through that first step. We aim to remove the complexity and learning curve of investing in cryptocurrency by allowing anyone to get started faster and safer through our platform.
Click here to learn more about how Peccala does this.
