The use of cryptocurrencies has been sweeping the globe, particularly over the course of the past several years. According to several resources, the total value of these digital currencies has risen to around $2 trillion. With a market capitalization of more than $800 billion, Bitcoin is the most widely used of the various digital currencies. Digital gold has attracted investors, many of whom come in with little knowledge but a lot of optimism.

May investors are rethinking the role of stocks in their portfolios due to the rapid rise of cryptocurrency. Stocks and cryptocurrencies have many differences. For the most part, cryptocurrency does not have any kind of backing, unlike stock, which is backed by the company’s assets and cash flow.

PRO TIP: You should know what you’re getting into before investing in cryptocurrencies and how they stack up against more traditional investments like stocks, which have a proven track record.

Which Is Better For Your Money: Cryptocurrencies Or Stock?

To be a successful investor, you must understand precisely what you’re getting yourself into. Consider the risks and advantages of investing, as well as what will drive the investment’s success, before deciding to invest. In the absence of this knowledge, they cannot perform the calculation. This isn’t investing at all; it’s more like a game of chance.

Investing in stocks and cryptocurrency requires a thorough understanding of how it works and how you can earn from them. 

Cryptocurrency

There is no tangible asset underlying the money for the most popular crypto coins, such as Bitcoin and Ethereum (the exception being specialized stable coins). Certain functions, including sending money to another person or using smart contracts that automatically execute when certain circumstances are satisfied, can be performed by using a cryptocurrency.

Why the price of cryptocurrencies fluctuates: The only thing driving bitcoin values is speculative sentiment because cryptocurrencies aren’t backed by assets or cash flow. Depending on the mood, pricing might alter dramatically. “The larger fool notion of investing,” as it’s commonly referred to, is what drives cryptocurrency’s value.

To make a profit on cryptocurrency investment, you must be able to sell it for more than you paid for it initially. In other words, the market must have a more positive outlook on it than you do. There are a lot of resources out there about how to invest in cryptocurrencies.

Stocks

A share of a company is a small stake in that company. As the stock market fluctuates, it’s easy to lose sight of this and focus on the possibility of profit. Stockholders have a legal claim to the company’s assets and cash flow as a result of their ownership stake in the company. You can use these as a basis for valuing your investment and backing it up.

Why do stocks rise and fall? The value of a company’s stock fluctuates based on the opinions of investors. Even while investors may feel overconfident about the stock in the short term, the stock price ultimately depends on the company’s capacity to generate its profits in the long term. To put it another way, a stock’s value increases over time as the underlying business grows stronger.

For an investment to be successful, the firm that owns the stock must do well over time. (To learn how to start buying your first stocks, follow this step-by-step approach.)

Benefits Of Stock Investing

With a strong track record of solid investment returns, the S&P500 has returned roughly 10% over the long term for investors. Even while stocks might be unpredictable in the near term, they have historically been safe investments to hang onto for the long run.

Solid Returns: As a stock reflects an ownership interest in the underlying company, its value over time is linked to that company’s long-term success. 

Intrinsic Value: Intrinsic value represents the value of a company’s assets, which generate earnings and cash flow for investors.

Accessible: With many online brokers slashing trading fees to $0, investing in stocks has never been easier. You can invest in individual stocks or an index fund that invests in a wide range of stocks. Investing in index funds is a great way to diversify your portfolio even if you don’t have a lot of money.

More stringent regulation: Various government agencies strictly regulate stock exchanges, brokers, and businesses. The Securities and Exchange Commission has already made it mandatory that companies provide specific information to investors. Stocks have been there for a long time, and there are some safeguards in place to protect investors.

Drawbacks Of Stock Investing

Volatility: Index funds are less volatile than cryptocurrencies since they contain a wide range of stocks. Stocks are more volatile than cryptocurrencies. Because of this, you must only invest in stocks if you have a lengthy time horizon so you can recover from any short-term losses.

Lessening the likelihood of large gains: The S&P 500 and other broad stock indices may not have the same potential for spectacular increases as cryptocurrencies. Over the long haul, stocks have returned roughly 10%, whereas cryptocurrency prices can fluctuate by 10% in a single day.

Benefits Of Cryptocurrency Investing

Hedge against Fiat Currency: For most investors, the decentralized nature of cryptocurrencies is one of the most appealing aspects. Unlike fiat currencies like the U.S. dollar or the euro, it is not controlled by central banks or governments that prefer to manufacture money and create inflation. Some investors have dubbed cryptocurrency “digital gold” because they believe it would shield them from inflation.

Possibility of huge gains: Investing in cryptocurrencies has the potential for huge returns on your money. Since their beginning, the prices of several cryptocurrencies have risen precipitously. People are drawn to cryptocurrencies primarily because of the possibility of price rising, but there is a lot of danger involved.

Rapidly increasing number of coins: Cryptocurrency has grown so much in popularity because of the growing amount of money that can be made by investing in a growing number of digital coins that were previously only available to accredited investors. There are currently more than hundreds — if not thousand different coins to pick from.

Widespread interest in digital currencies: Investors, businesses, and governments all seem to be getting more and more interested in cryptocurrencies. While Tesla first embraced Bitcoin as a form of payment, the company later reversed its decision. According to a report from the International Monetary Fund (IMF), El Salvador was the first Latin American country to accept Bitcoin as legal cash in 2021. For investors, a rise in digital currency acceptance might be a plus.

Drawbacks Of Cryptocurrency Investing

Aggressive volatility: There’s been so much volatility in the early stages of cryptocurrency’s existence. Their value is determined only by the whims of market participants. You’ll never really know where a coin will go next, and fortunes can be gained and lost in a matter of minutes.

There have been several high-profile thefts involving cryptocurrencies, despite the claims of cryptocurrency advocates that digital money is more secure. It can be challenging to reclaim money that has been stolen.

No underlying assets or earnings: Unlike stocks, which are backed by underlying assets and earnings, cryptocurrencies have no intrinsic value. Their future earnings potential derives from the value of stocks and the returns they will provide to their owners, but cryptocurrencies do not.

Many countries, including El Salvador’s, have expressed concern about the regulatory dangers associated with cryptocurrency. Other countries may follow China’s lead and prohibit them outright.

Other Factors To Ponder When Deciding Whether To Invest In Stocks Or Cryptocurrency

The Span Of Time

Your investment time horizon, or when you expect to require the money, is a critical consideration. To ensure that it’s there when you need it, the safer your asset, the quicker your schedule, the better. 

People with a short time horizon should avoid risky investments. Generally speaking, experts recommend that investors in hazardous assets like equities need at least three years to ride out the volatility of such assets.

Cryptocurrency

• While stock prices fluctuate, the price of a single bitcoin can change drastically in a matter of seconds. It’s possible that Bitcoin’s value will drop by more than half before rising by 100% in the year 2021. Short-term investors should avoid crypto because of its high level of volatility.
• Traders that can afford to tie up their funds and wait for them to recover are better suited to crypto. Think in terms of years, not weeks.

Stocks

Even though stocks are prone to swings, they are less volatile than cryptocurrencies. Individual equities tend to be more volatile than a diversified portfolio of stocks.

• Investment in stocks is best suited to investors who can leave their money alone and don’t need to keep an eye on it. The more free time you have to invest, the better.
• In some cases, a stock’s volatility can be greater than that of another. Growth stocks, however, are more volatile than value or dividend equities, for example.
• When it’s time to start drawing on your savings, such as when you are near retirement, investors may switch from riskier (growth) equities to safer (dividend) ones.

Management Of One’s Assets

You don’t have to choose between cryptocurrency and equities or any other asset class while putting together your investment portfolio. It’s all about balancing your risk and time horizons in your portfolio.

Stocks

• Given stocks’ long-term solid track record, a diversified stock portfolio should make up the majority of your portfolio, especially if you have decades before you need to tap it.
• Investing in individual stocks necessitates extensive study in order to maximize your returns.
• You don’t need to do a lot of research before investing in a broadly diversified fund like the S&P 500 index fund, which has the potential to produce substantial returns.

Cryptocurrency

• It’s best to keep cryptocurrencies in a modest portion of your entire portfolio because of their inherent dangers. Consider a bare minimum of 5%.
• Investing in cryptocurrencies, even if only a modest amount, could have a significant impact on your portfolio if it takes off. Additionally, if crypto doesn’t take off, you won’t be out your entire investment.
• In the event that crypto becomes a significant component of your overall portfolio risk, it is possible to re-allocate more of your money to stocks.

Key Takeaway

Although the price of several cryptocurrencies has risen since their introduction a few years ago, investors should know what they’re investing in before blindly following the lead of other traders. Consider your risk tolerance and financial needs before deciding to invest in crypto. It’s possible to make money without investing in cryptocurrencies, and some investors, like Warren Buffett, refuse to invest in them.