Crypto vs. Stock: What's The Difference?



Oct 25, 20224 min read

Crypto vs. Stock: What's The Difference?

Stocks are a long-established asset class that can yield both long and short-term returns. Crypto is a newer financial instrument that is prone to higher price volatility and risk. While both instruments attract traders and investors, cryptocurrencies are often seen as an alternative to more traditional assets. That said, there can be profitable strategies in both markets.

1. Ownership

You normally need a brokerage account to conduct the transaction in order to buy and possess shares. Information such as your address, Social Security number, signature, and more are used to verify that account. This provides some defense against fraud or identity theft.

However, cryptocurrency provides less security and greater privacy. A crypto wallet, which might be entirely virtual or reside on a USB drive, is where you save your coins or other digital assets. Because of the hazards that come with anonymity, you run a special chance of forgetting your password or losing access to your account, or losing crypto to hackers. Or you can lose all of your cryptocurrency if you lose your USB disk.

2. Exchanges

Over three centuries have passed since the invention of the stock exchange, which is most notably located on Wall Street in New York City. On the other hand, cryptocurrency exchanges are a relatively new concept. Binance, the biggest, debuted in 2017. Another significant participant, Coinbase, was established in 2012.

As of August 2022, Binance has a daily trade volume of $76 billion. The Nasdaq, which makes up a very minor portion of the world stock market, had a trading volume that was over three times that amount at the same time. And according to some estimates, the Nasdaq only makes up 14.5% of the whole stock market.

3. Liquidity

The ability to move in and out of your investments, whether they be stocks or cryptocurrencies, is also impacted by smaller markets. Liquidity is the capacity to transact at will. Due to a large number of actively trading stock market participants, investors often view equities as being very liquid.

Contrarily, the liquidity of different forms of cryptocurrency differs greatly from one another. Simply because it sees more trading activity than most cryptocurrencies, bitcoin is more liquid. This indicates that there are more buyers and sellers who are looking to transact if you want to purchase or sell a certain coin.

Slippage, which entails losses when you have to sell a significant portion of an asset during a period of low liquidity, can affect both stock and cryptocurrency investors. Given the decreased levels of liquidity in the cryptocurrency markets, the risk is higher for owners of cryptocurrencies.

4. Volatility

Both buying cryptocurrency and equities involve risk and volatility. Both assets have a fluctuating value, making it practically difficult to predict when is the optimum moment to purchase or sell.

The stock market has a well-deserved reputation for being volatile, but over the course of decades, the overall market has tended to increase, with an average total return of approximately 10%. Investors have access to a variety of information sources to help them decide whether to buy certain securities because previous performance is not a guarantee of future results and public equities are required to publicly disclose their financial information.

However, bitcoin is more likely to see abrupt, significant swings in value, often without prior notice, which has led some people to ask in particular why cryptocurrency might be so volatile. For cryptocurrency traders, these fluctuations can result in potentially enormous winnings, but they can also produce huge losses in a short amount of time. Over 1,600 different types of crypto have completely disappeared in recent years. While it is conceivable for publicly traded firms to fail, they are much less likely than the majority of cryptocurrencies to lose all of their value.

5. Trading Costs

Transaction costs, like commissions, may be incurred each time an investor buys or sells stocks, reducing their returns. Even investors who choose to invest in low-fee, no-load index mutual funds, which are simply collections of stocks, must pay expenses associated with maintaining the fund.

Trading through a brokerage account and actively managed funds may have greater charges.

Since trading in cryptocurrencies can be expensive, there isn't a significant difference between them and equities in this instance. Cryptocurrency exchangers levie fees. And then there are "gas fees," which are the charges a network makes from various blockchain transactions. From one type of cryptocurrency to another, those costs differ greatly.

To speed up transactions, certain networks would increase the gas fee. However, according to some estimates, the major exchanges charge at least 1.5% in fees when buying or selling cryptocurrency. Any gain below 3% will be lost as a result.

6. Regulation

Stocks and stock markets are regulated by national organizations like the Securities and Exchanges Commission (SEC) in the US. A certain degree of transparency regarding publicly listed corporations is guaranteed by the regulation of such businesses.

In comparison, cryptocurrency regulation is still mostly undeveloped.

That's advantageous for some investors who may feel conflicted about government regulation. Each cryptocurrency is administered on decentralized networks by individuals who are primarily concerned with the upkeep of their technology and keeping the project's integrity.

Cryptocurrencies and exchanges continue to run the risk of going through significant change or being completely eliminated since the regulation of cryptocurrencies is a moving target. For instance, the issue of whether cryptocurrencies are securities or commodities has been a hot topic of discussion in 2022.

7. Trading Hours

The stock markets are often only accessible during regular business hours, which are typically Monday through Friday, and they are closed on weekends and national holidays.

In contrast, the cryptocurrency market is open every day of the year, around-the-clock. One reason why the cryptocurrency is so volatile may be due to the markets' always-open nature. Years of stock market studies have demonstrated that investors frequently give in to emotional impulses that might influence their behavior while making investments. A break might aid in regaining control and organization.

8. Diversification

A portfolio of varied holdings that perform differently in various markets is the goal of many investors. In general, the performance of stocks is frequently correlated with that of the overall economy and is influenced by a variety of variables, including inflation, unemployment, interest rates, and more.

Some cryptocurrency backers assert that this asset class is non-correlated, which means that it doesn't respond to market events the same way traditional assets like stocks and bonds do. Others think it may serve as an inflation hedge, making it a desirable counterbalance in a portfolio that contains more assets that are vulnerable to inflation.