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Analysis

Crypto vs Stocks- Differences Traders Should Know

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Stocks and cryptocurrency are two of the most popular investment types in the present-day global market, traded in extremely high volumes on a daily basis. 

The rise of online trading marketplaces, brought on by rapid technological development and the advent of mobile applications, has meant that it’s now easier than ever for investors to begin their trading journey.

This recent evolution has brought about a shift in the trading patterns of many investors, leading to an ongoing debate, centring around cryptocurrency vs stocks and which one is the better investment.

In this article, we will be delving into the key details as we take a closer look at investing in stocks vs cryptocurrency, including what they both are, and the differences between them.

What is Cryptocurrency?

A cryptocurrency is an entirely digital asset, meaning that it does not exist in physical form, but instead operates online as a virtual currency.

There are many thousands of cryptocurrencies in existence, with Bitcoin the standout currency, having established a solid position as the most popular and valuable option currently available.

Most cryptocurrencies form part of a decentralised structure, based on a distributed database and computerised network, known as a blockchain.

This type of digital currency is extremely difficult to counterfeit or double-spend, as it is secured by cryptographic systems that ensure the anonymity and encryption of transactions.

It is a relatively new medium of exchange, having risen to popularity in the last couple of decades with the introduction of the aforementioned digital currencies.

What are Stocks?

A stock is a type of security that represents the ownership of a fraction of a publicly traded company, and it is also referred to as equity.

Units of stock are called shares and they entitle the owner to a proportionate amount of the corporation’s assets and profits, equal to the number of shares owned.

An investor can generate income by selling their shares to other investors, in a process known as capital gains, which represents the difference between what was paid for the asset and the amount it was sold for.

Stocks also accrue value in the form of dividends, where investors receive payouts through vote decisions made by shareholders and other rights holders. 

Cryptocurrency vs Stocks – Key Differences

For any investor that is looking for their next trading opportunity, or for those seeking to enter the market for the first time, it is vitally important that they have a good understanding of the critical differences when it comes to cryptocurrency vs stocks.

There are many distinguishable features between the two investment options, and some similarities. Below we will outline three of the most important differences all traders should be aware of.

Volatility and Risk

When it comes to volatility, there is a clear disparity between cryptocurrency and stocks, with the former being more volatile than the latter.

In fact, cryptocurrency is one of the most volatile investment types there is, both in terms of the individual assets and the market as a whole.

Its price movement relies primarily on sentiment, as it is generally not supported by assets or cash flow, making it at the whim of investors’ mood.

Stocks tend to be the less volatile asset when compared to cryptocurrency, but that doesn’t mean that they are stable investments.

Sudden and severe changes in stock values are certainly a notable characteristic of this asset, with historic events such as Black Monday and Black Friday demonstrating that entire stock markets can plunge in a single day’s trading.

Diversity of Investment

At first glance, it can appear that both assets offer up many thousands of potential investment opportunities, therefore making them similar.

However, upon closer examination it becomes clear that this most certainly is not the case, with their respective markets not being as diverse as initially thought.

Currently there are more than 6,000 potential companies on the combined listings of the NASDAQ and the New York Stock Exchange, while there are somewhere between 10,000 and 12,000 cryptocurrencies available to trade.

In terms of cryptocurrency markets, Bitcoin overwhelmingly dominates the field, taking up between 55% and 70% of the entire market – something that is not evident or even possible to achieve in the stock market.

That said, the FAANG stocks, featuring the five market beasts of Facebook, Apple, Amazon, Netflix, and Google, make up around 20% of the entire S&P 500, but it does not come close to the preeminence of Bitcoin.

Market Regulation

Stocks are highly regulated assets in a controlled environment, with stock markets governed by various rules and regulations to protect those investors that trade in them.

In the United States, the main regulatory body is the Securities and Exchange Commission (SEC), while there is the Financial Conduct Authority (FCA) in the United Kingdom and the European Union has the European Securities and Markets Authority (ESMA).

On the other hand, cryptocurrency markets remain largely unregulated, as bodies such as the SEC and the Internal Revenue Service (IRS) decide on how to approach its future governance.

This lack of regulation is perfect for those looking to explore aggressive portfolios, but it also leaves the door open to fraudulent activity and other market scams, such as pump-and-dump schemes or cash grabs.

Investors need to take into account a range of factors when weighing up cryptocurrency vs stocks, with the stock market offering greater risk management in terms of regulatory, and cryptocurrencies enabling more freedom but also more volatility.

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