Cryptocurrencies are the new hot investment to put your money on. In the last couple of years, curiosity and interest around cryptocurrency have grown dramatically. According to Bloomberg, the combined worth of this digital money is more than $2 trillion. Bitcoin is the one that dominates the cryptocurrency market and investors would simply love to have even a fraction of a Bitcoin in their portfolio. Check out more at multibank.io.
A wise investor would not put all eggs in one basket and maintain a diverse portfolio. Hence, a mix of crypto, commodities, stocks, etc is highly recommended. If we are to analyse a portfolio that has both stocks and crypto, it is all about striking a balance with these assets.
Cryptos can have the most volatile price swings leading to great profits as well as losses. On the other hand, stocks can also be volatile but the price movements are not likely to be as wild as crypto.
As an investor, your aim should be to meet your financial goals by using the best possible combination of stocks and cryptocurrency in your portfolio. The first step to doing this is to understand the pros and cons of each of them:
Stocks
When you buy stocks of a company, you gain some degree of ownership in the business. If you get frazzled by the changing prices of stocks, you may not be able to see the complete picture. Other than the potential profit, as a stock/shareholder, you legally own a part of the business that allows you a degree of claim over the assets and the business’s cash flow.
What makes stock prices rise and fall?
The movement of stock prices depends a lot on how investors predict the company’s future. That said, investor sentiment might sometimes end up being a bit too optimistic for short positions. Always remember that market speculations are only guiding principles, stock prices completely rely on a company’s growth in the long run.
Cryptocurrency
Barring stable coins like USDT, Tether, etc, cryptocurrencies are usually not backed by any physical asset. Even the bigger players like Bitcoin and Ethereum have no backing and are simply virtual assets. Using cryptocurrencies, you could transfer money or operate smart contracts that could execute orders on your behalf when the pre-decided conditions are met.
Why does a cryptocurrency’s value change?
Unlike stocks, cryptos depend heavily on investors’ sentiment. The market’s mood can cause dramatic price movements in cryptocurrencies and thus it is only the ‘greater fool theory of investing’ that keeps it going! The only thing that keeps the ball rolling is the belief that there will be buyers in the future. Therefore, your crypto investment would only be a success, when there is a buyer to whom you can sell the tokens at a higher rate.
Cryptocurrency vs. stocks: The core difference
While both stocks and cryptocurrencies are good investment options, there are several differentiating factors between them:
Ownership
Generally, an investor requires a trading account at a brokerage to trade stocks. It is actually the brokerage that conducts trades and keeps the stocks on your behalf. You would also have to reveal personal details like address, social security number, etc. However, the brokerage also ensures a greater degree of security.
Anonymity has often been hailed as one of the key advantages of investing in cryptocurrencies. The buyer’s identity is not revealed and the crypto owner can keep their assets safe in a digital wallet or on a storage device. However, the catch is that as a crypto owner, you must be responsible for your token’s safety and for tracking it on the blockchain. Also, you should have a great memory or a way to not lose your 16-character password, or else you could lose access to your wallet. Yet another problem is keeping your digital wallets safe from hackers.
Exchanges
Stocks are traded through exchanges globally allowing investors a secure and stable platform to carry out their trades. Additionally, the exchanges are built to support a great volume of trades every single day. Since trades are conducted on regulated exchanges the nitty-gritties of which are country-specific, investors’ interests and funds are protected.
On the other hand, exchange platforms for cryptocurrencies are new and limited. There are numerous cryptocurrencies available today that have to be listed on the exchanges. You might even come across certain exchanges that involve third parties to facilitate hassle-free trading of cryptos with fiat currencies like the Euro or the U.S dollar.
Volatility
The stock market is no stranger to volatility and price fluctuations are quite common. Any development or news could cause stock prices to shoot up or hit rock bottom. If you’re familiar with Black Fridays and Black Mondays, you know how drastic these changes can be. Generally, there’s a valid economic or technical cause for these price movements but usually, the losses aren’t very damaging in the long run.
Market volatility has played a particularly notorious role in the cryptocurrency market. The most recent example being of LUNA which crashed severely to reach a net worth of just $3! Ethereum’s per token rate was $730 in 2021, which reached $4,080 in the same year by the month of May.
Regulation
The biggest learning from the Great Depression witnessed a devastating market crash in 1929, which led to the creation of the Securities and Exchange Commission (SEC) in the United States. It was formed to create and implement means to protect investors. Companies on the stock market must reveal all relevant details that could have a potential impact on stock prices so that investors are well-informed.
Even though investor safety remains one of the biggest challenges in the cryptocurrency market, many see it as a great plus. The decentralized, unregulated nature of the cryptocurrency market allows more freedom for investors.
Strategic complements
You may have observed that cryptocurrencies and stocks are similar in many ways despite being starkly different assets. If an investor can make a judgment based on the pros and cons associated with each of these assets, they can use them strategically for financial gains.
An amalgamation of stocks and cryptocurrency in your portfolio can help you strike a balance with your reward-risk ratio. This is because stocks are more stable and are considered to be great for systematic wealth creation, cryptos can be risky. If you’re willing to take the risk, the chances for loss are high but so is the probability of making a big profit.
