In recent years, cryptocurrency has exploded in popularity all over the world. The total market capitalization of all digital currencies now exceeds $2 trillion. Bitcoin is the most popular, according to CoinMarketCap.com, with over $1 trillion invested. Many investors, many of whom have no prior experience in the field, have flocked to the digital gold rush.
Many investors are reconsidering their stock holdings due to the rapid growth of cryptocurrency. Stocks and cryptocurrencies, on the other hand, differ in a variety of ways. Stocks are a type of stock ownership (backed by the company’s assets and cash flow), whereas cryptocurrency is largely unsupported.
If you’re thinking about investing in cryptocurrency, you should know what you’ll get and how it differs from traditional stock investments.
Is it better to buy stocks or invest in cryptocurrencies?
Any wise investor should be completely knowledgeable about the investments they are making. It’s critical to consider the risks and rewards of investing, as well as the factors that will determine whether the investment succeeds or fails. Without that information, they won’t be able to solve the problem. This isn’t really investing; in this case, it’s more like gambling.
The most important aspects of stocks and cryptocurrency that investors should be aware of are listed below.
A stock is a share of a company’s ownership. If you’re distracted by stock price fluctuations and profit opportunities, it’s easy to lose sight of this. Shareholders have a claim on the company’s assets and cash flows because shares are a legal ownership interest in the company. They support your investment and serve as a basis for valuation.
What factors influence stock price rises and falls? As investors assess a company’s future prospects, stock prices fluctuate. While short-term investors may become overconfident in a stock, its price is ultimately determined by the company’s ability to grow earnings over time. That is, as the underlying company succeeds, the stock rises over time.
For a stock to be a successful investment, the underlying company must perform well over time.
The majority of well-known cryptocurrencies, such as Bitcoin and Etherium, are not backed by tangible assets (with the exception of specialized Stablecoins). You can use cryptocurrency to send money to others and to carry out smart contracts, which are automated contracts that are carried out when certain conditions are met.
Because cryptocurrency is not backed by assets or cash flow, the only thing that drives its price up and down is sentiment-driven speculation. In response to shifts in sentiment, prices fluctuate dramatically.
As a result, the only motivation for cryptocurrency is the hope that someone will buy it at a higher price in the future – a concept known as the “big fool investing theory.”
You must be able to sell a cryptocurrency for a higher price than you paid for it to make it a profitable investment. That is, the market must be more upbeat about it than you are.
When it comes to cryptocurrency and stocks, there are a few things to consider.
Risks and Security
If you’re thinking about investing in the stock market or cryptocurrency, think about how much risk you’re willing to take. Are you prepared to deal with such assets’ high volatility? How well do you react to gains and losses in your investments?
Because stocks represent a portion of a company’s ownership, stock returns are determined by its success over time.
If investors don’t like the stock, they can sell it and lower the price, but if the company goes bankrupt, the stock will be worthless.
Stock volatility is high, with many stocks rising by 100% or more over the course of a year and falling by the same percentage.
Investing in the stock market is typically a well-known and respected method.
Investors who don’t want to buy individual stocks can put their money into mutual funds based on the Standard & Poor’s 500, which have an average annual return of 10%.
Because cryptocurrency isn’t usually backed by assets or cash flow, it relies solely on positive sentiment to determine its value.
Cryptocurrency has the potential to depreciate to zero if traders decide they no longer want to hold it because it is unbacked.
This market is notoriously volatile, with cryptocurrencies rising or falling by more than 50% in a single year.
Countries, such as China in 2021, may outright prohibit cryptocurrency use.
Due to its youth, cryptocurrency has yet to establish itself as an asset class.
While cryptocurrency is risky, it is even riskier than stocks.
A critical factor to consider is the length of your time horizon, or when you’ll need money from investments. The shorter your time horizon, the safer your asset must be to arrive when you need it. The higher the volatility, the less suitable an asset is for short-term investors. It takes at least three years for investors in risky assets, such as stocks, to recover from volatility, according to experts.
The volatility of cryptocurrencies is lower than that of stocks. A well-diversified stock portfolio is less volatile than individual stocks.
Stocks are a better option for investors who don’t require immediate access to their funds and can afford to leave their investments alone.
Volatility is higher in some stocks than in others. Stock prices and dividend stocks, for example, are more volatile than growth stocks.
Investors may switch from more aggressive stocks (growth stocks) to safer stocks as they approach retirement because they need to use their money (dividend stocks).
Bitcoin lost more than half of its value in a matter of months in 2021, only to gain 100 percent the following year. Because of its volatility, cryptocurrency should be avoided by short-term investors.
Cryptocurrency is a better option for traders who are willing to put their money on hold and wait for it to recover. Think in terms of years rather than weeks. You don’t have to choose between cryptocurrency and stocks or other types of assets like bonds or funds when it comes to building your portfolio. It’s all about matching your portfolio to your risk tolerance and time horizon.
Due to its inherent risks, cryptocurrency should only be a small part of your overall portfolio. I’m guessing it won’t be more than 5%.
If cryptocurrency takes off, even a small investment can make a big difference in your portfolio.
If cryptocurrency becomes a significant part of your portfolio, you can reallocate more funds to stocks to lower your portfolio’s overall risk.
A diversified stock portfolio should make up a significant portion of your portfolio, especially if you have decades before you need it, given stocks’ long-term track record.
If you want to get a good return on your individual stock investments, you’ll need to do a lot of research.
You can buy a broadly diversified fund like the S&P 500 index fund without doing much research and reap the benefits of high returns if you invest in mutual funds.
The value of cryptocurrency has risen, but investors should know what they’re getting into before investing. Consider your risk tolerance and financial requirements before investing in cryptocurrency. Some investors, including Warren Buffett, refuse to invest in cryptocurrency because they believe they can make money without it.