The Difference Between Investing in Cryptocurrency and Stocks
Bitcoin and cryptocurrency are some of the most popular investments these days. Even Wall Street, the hub of stock trading and traditional investment vehicles, has taken notice. People are talking about initial coin offerings (ICOs) besides the usual initial public offerings (IPOs) that are reminiscent of traditional stock investments.
If you are looking into investing your money and are considering both crypto and stocks, you need to know some differences in order to make a better decision as to which instrument to invest in.
What’s the Difference Between the Two?
Stocks have been around for centuries, while cryptocurrency is still in its early stages, having risen in popularity over the last decade. With stocks, you are investing in a company based on its growth potential. With cryptocurrencies, you are buying tokens of a particular currency, either to hold them in hopes that they gain value over time, or to use them for payments. Unlike stocks that trade in traditional stock exchanges, cryptocurrencies are bought from a crypto exchange and kept in a digital wallet.
Risks vs Gains
Of all traditional investment vehicles, stocks are considered one of the riskiest. The issuing company may undergo challenges that could affect the stock price, its ability to pay dividends, and drop below the value you bought the stock for. However, not all stocks have the same degree of risk, and for those that have higher risk, the drop does not necessarily happen drastically. Many times, if you are alert, you have time to bail out and cut your losses. If you stay with blue chip stocks or invest in indexed equity funds, the ups and downs also tend to be less volatile.
This is different from cryptocurrency, as the digital currency market is even more volatile than the stock market. There is great potential for gains with the crypto spiking significantly. An example is Ethereum. In 2015, an Ethereum coin was only worth 67 cents. By early May 2021, it hit a high of almost $4,200 before dropping back down to $2,600 levels in that same month. Still, it did much better than the S&P 500 which increased by only around 42% from the year before.
Before you sink your savings into cryptocurrency, make sure you also understand that cryptocurrencies can lose significant value very quickly. While you can make a lot of money, you can also lose a great deal if you aren’t careful.
What Should I Choose?
Your choice of investment will ultimately depend on your appetite for risk. You need a high tolerance level for risk when investing in cryptocurrencies and the stomach to weather its ups and downs. Stocks can also be risky, but if you do research on the companies you plan to invest in, you are likely to end up with good prospects. If you choose to go with crypto, selecting great cryptocurrency stocks may give you some protection from losing your entire investment.
You can have an investment mix of both stocks and cryptocurrency. Just remember that when deciding how much to put in each, you consider advice from the experts: assess your risk tolerance level, diversify your investments, and only invest in risky vehicles that you can afford to lose.