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Cryptocurrency vs Stocks: Where should you invest your money?
- Ashesh Anand
- Feb 25, 2022
- Updated on: Feb 04, 2022
Although investment results for either option are never guaranteed, cryptocurrency is substantially more volatile than equities. If you're interested in crypto investing, if you have extra money after establishing your retirement accounts, reducing debt, and ensuring you have a sizable emergency fund, it might be worth setting aside some investment funds for it.
Cryptocurrencies are high-risk investments with the potential for huge gains—but you can't bank on it.
When purchasing cryptocurrencies, it's critical to understand what you're getting and how it compares to traditional investments like equities, which have a proven track record over time.
Cryptocurrency
In general, cryptocurrency is not backed by any hard assets (with the exception of specialist stablecoins), and this is true for the most prominent crypto coins, such as Bitcoin and Ethereum.
You may be able to use a cryptocurrency to complete particular tasks, such as transmitting money to another person or using smart contracts that execute automatically when certain circumstances are satisfied.
Also Read | Top Most Stable Coins of 2022
Why cryptocurrency rises and falls?
The only thing that moves bitcoin values is speculation driven by sentiment because cryptocurrency is not backed by assets or cash flow. Prices fluctuate when public opinion shifts, sometimes dramatically. As a result, bitcoin is only motivated by the prospect that someone would acquire it for a higher price in the future - a concept known as the "greater fool theory of investment."
To make a cryptocurrency a profitable investment, you must be able to sell it for a higher price than you bought it for. That is to say, the market must be more optimistic than you are about it.
Stocks
A stock is a fractional share of a company's ownership. If you're overwhelmed by the fluctuating stock prices — and the opportunity for profit — it's easy to lose sight of this. The stock allows stockholders a claim on the company's assets and cash flow because it is a legal ownership position in the company. These are the assets that back up your investment and serve as the foundation for its valuation.
Also Read | Floating Stocks
Why do stocks rise and fall?
The price of a stock fluctuates as investors appraise the company's future prospects. While short-term investors may become unduly excited about the stock, the stock price is ultimately determined by the company's capacity to grow earnings over time. That is, a stock rises over time as a result of the underlying company's success.
If you're considering investing in a market-based asset like bitcoin or stocks, you should think about your risk tolerance first. Can you deal with the high volatility of these assets? How well do you respond to investing gains and losses?
Points to consider before buying Stocks
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Because stocks represent an ownership interest in a corporation, their long-term performance is determined by the success of the underlying company.
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If investors dislike a stock, they can sell it and drive the price down, but the stock must eventually go out of operation for it to be worthless.
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Equities have a high level of volatility, with many stocks rising 100 percent or more in a year and falling just as quickly.
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In general, the stock market is a well-established method of investing with a proven track record.
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Investors who don't want to buy individual companies can invest in mutual funds based on the Standard & Poor's 500, which has averaged a 10% annual return over the years.
Watch this: How the blockchain is changing money and business | Don Tapscott
Points to consider before buying Cryptocurrency
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Because bitcoin is not backed by assets or cash flow, it relies solely on positive sentiment to drive up its price.
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Because bitcoin isn't backed by anything, it might plummet to zero if traders decide they don't want to hold it.
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Volatility is extremely high in this market, with cryptos frequently gaining or dropping by 50% or more in a year.
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Countries could outright prohibit the use of cryptocurrencies, as China did in 2021.
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Cryptocurrency has yet to establish itself as an asset class due to its infancy.
Also Read | 10 Best Automated Trading Software
Similarities Between Stock Trading and Cryptocurrency Investing
To connect with financial markets nowadays, most investors simply log on to a digital exchange, brokerage account, mobile application, or other online platform.
In terms of architecture, order-book-based liquidity mechanisms, and trading options, most stock and crypto platforms are comparable. Buying and selling stocks has never been easier, and cryptocurrency exchanges have made digital asset investing as straightforward as investing in traditional markets.
The same basic trading order types are available on most retail trading platforms: market, limit, and stop (or stop-loss). As a refresher, here's what you need to know:
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An order to purchase or sell an asset as soon as feasible at (or near) the current bid (for a sale order) or ask (for a buy order) price is known as a market order. A market order ensures that the order will be fulfilled, but it does not ensure that the price will be met.
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A limit order is used to buy or sell a specified item at a specific price, or even better if possible. A purchase limit order can execute at or below the limit price, whereas a sell limit order can execute at or above the limit price.
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To prevent excessive losses, a stop (or stop-loss) order is utilised. It's an order to purchase or sell a stock when the price of a security reaches a certain level, called the stop price. A stop order becomes a market order when the stop price is reached.
Also Read | Different Benefits of Stock Market
Distinctions between Cryptocurrency and Equities
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What you've got:
When you purchase cryptocurrency with PayPal, you are given the right to a specific amount of the digital money. Cryptocurrency may one day be used in transactions as readily as conventional currencies, but for now, it is essentially a store of value that you may keep or sell. Stocks, on the other hand, are issued by firms as a kind of equity or ownership in the company.
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Volatility:
Both crypto and stocks have the potential to go up and down in value, thus investing in either is risky. Cryptocurrency, on the other hand, has a reputation for abrupt and severe fluctuations in value that can occur without warning.
Stocks, on the other hand, are directly linked to firms that are required to publicly and on a regular basis explain how they've been doing and how they anticipate to do in the future. Investors may be able to use this knowledge to lessen volatility risk.
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How they’re governed:
To safeguard fair trading, federal organisations such as the US Securities and Exchange Commission (SEC) have authority over the whole stock market. The Crypto market, on the other hand, is currently regulated by no central body. Governance for each Crypto is split among individuals responsible for developing and maintaining its technology.
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Operating hours:
Unless there are exceptional circumstances, the crypto market is normally open 24 hours a day, 365 days a year. Even when the clock strikes midnight on New Year's Eve, the price of cryptos will fluctuate. The stock market is only open during business hours, and it is closed on weekends, holidays, and nights
(Interested in Mutual Funds? Here are some of the best Mutual Funds worth investing)
Which Should You Invest In: Crypto vs. Stocks?
Should you put your money into equities or cryptocurrencies? If you have the extra funds, investing in both may be the best plan. Many experts recommend investing the majority of your portfolio to lower-risk, more stable assets like mutual funds and exchange-traded funds, such as S&P 500 index funds.
You might allocate a tiny portion of your portfolio to speculative capital, which is invested in high-risk, high-reward assets like cryptocurrency. It's ultimately up to you how much of your assets are speculative, but experts recommend no more than 5%.
Only put money into these assets that you won't require in the near future. The advantage of diversifying your portfolio with cryptocurrencies is that if cryptocurrency's value skyrockets, the 5% you put into it will enjoy strong returns, potentially doubling the value of your entire portfolio.
You could then sell a portion of your volatile investments and reinvest the proceeds in more stable assets, never putting more than 5% of your portfolio in risky investments.
Also Read | What the future holds for Cryptocurrency
Must Watch: STOCKS VS CRYPTOCURRENCY: Which is BETTER?
Cryptocurrency has risen in value, but investors should understand what they're getting into before jumping in just because other traders have. If you decide to invest in cryptocurrency, think about how it will fit into your risk tolerance and financial needs. Some investors, including superstars like Warren Buffett, will not invest in bitcoin since they can generate high profits without it.
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