Crypto and Stocks: Key Differences for Investors

In this article, we will explore the main differences between crypto and stocks. We will compare risks, returns, regulations, and technology. This guide is suitable for both beginners and experienced investors.

The financial world constantly evolves, with crypto emerging as a hot topic alongside traditional assets in recent years. Let’s compare stocks and crypto as investment assets to help you better understand their characteristics, risks, and potential benefits.

Key Concepts

Stock: A security that gives an investor ownership in a public company issuing shares. Such companies have a corporate structure and regularly report on their activities.

Stocks can be common or preferred. Common stocks grant voting rights in the company with sufficient ownership but don’t guarantee dividends. Preferred stocks have limited voting rights, but typically guarantee dividend payments if the company decides to issue them. Stock prices usually reflect the company’s financial health and investor confidence in its prospects.

Crypto: A digital asset based on blockchain technology. It can serve various functions: as a medium of exchange, store of value, participation in decentralized finance (DeFi) ecosystems, and profit generation. Crypto can be issued by anyone, including companies, as their assets. With few exceptions, their value depends on demand and investor faith in their future.

How Are Stocks and Crypto Regulated?

Stocks are strictly regulated by US government agencies, such as the SEC. Companies must regularly publish financial reports, and various laws and regulations protect investors. Trading occurs on licensed exchanges.

Crypto regulation varies by country and is often still in development. Investors need more protection and must ensure their security (using crypto wallets and safely storing keys). Thanks to blockchain technology, only you and token issuers can manage your assets if provided for in their structure. It makes it impossible to physically restrict fund movement within crypto ecosystems, which benefits investors and users in countries with heavy sanctions and regulatory pressure.

Where’s the Greater Risk?

Stocks are moderately volatile, especially for large companies. Volatility measures the price variability of an asset or market over a specific period. Risks are mainly related to economic cycles, industry trends, and management decisions. Stocks can be diversified through index funds or ETFs.

Crypto is known for high volatility and sharp price fluctuations over short periods. Risks are associated with regulatory changes, technological vulnerabilities, and market manipulations. Crypto diversification is more challenging due to the high correlation between cryptocurrencies.

How to Buy Crypto? Where Are Stocks Traded?

Stocks: Traded on stock exchanges during specific hours (usually business hours on weekdays). Most stocks are highly liquid. Particular stocks can only be purchased in lots, ranging from one to several dozen shares. It can be challenging for investors with small capital, so you can buy stock indices or ETFs whose value is derived from several issuing company shares.

Crypto: Traded 24/7 on various crypto exchanges and decentralized platforms. Cryptocurrency liquidity heavily depends on its popularity and can differ between centralized exchanges and decentralized platforms due to liquidity pool mechanisms, as we discussed in our article about DEXs.

How to Evaluate Assets?

Stocks are evaluated using fundamental and technical analysis and assessing market trends and economic factors.

Fundamental analysis: Studying a company’s financial indicators, business models, and growth prospects. Here are some key indicators used by investors:

• EPS (Earnings Per Share): Measures company profitability per share. EPS growth usually positively affects stock prices.
• ROE (Return on Equity): Measures the efficiency of shareholder capital use. A high ROE often indicates good company management.
• P/E (Price-to-Earnings) ratio: This ratio shows how much investors are willing to pay for each dollar of company profit. A low P/E may indicate undervalued stocks.

There are dozens of other indicators besides these.

Technical analysis: A method of predicting future stock prices based on studying past market data, such as prices and trading volumes. The main idea is that all important information is already priced in, and price behavior can be predicted by analyzing its past movements and patterns.

Key concepts used in technical analysis include charts, trends, support and resistance levels, models, and patterns.

Technical analysis relies heavily on understanding market participant psychology; other participants use technical analysis.

Assessing market trends and economic factors: Analyzing the broader context in which stocks are traded: GDP analysis, inflation, interest rates and their impact on the stock market, geopolitical events, analysis of overall market sentiment (bullish or bearish), assessing the impact of new laws and regulations on the company’s business and industry as a whole, comparing the company with competitors and evaluating its market position.

In the crypto sphere, other evaluation methods are used, although fundamental and technical analysis are still relevant:

On-chain metric analysis. On-chain analysis uses data recorded directly on the blockchain, providing objective information about the network’s state, including the number of active addresses, transaction volume, average transaction fee, coin distribution, and more.

Assessing technological value and application potential. This aspect focuses on the crypto’s technical characteristics and practical utility, such as the network’s ability to handle growing transaction volumes, evaluate possibilities for creating decentralized applications, and interact with other blockchains and traditional systems.

Analysis of community sentiment and technology adoption. This aspect considers social and market factors: social media activity, community development and contribution, crypto integration into traditional financial systems, legislative changes in different countries, growth in wallet numbers and unique users, assessment of crypto availability on major trading platforms, and more.

A comprehensive analysis of these aspects provides a holistic view of a specific cryptocurrency’s state and prospects, helping to make more informed investment decisions in this dynamic and rapidly evolving field.

So What’s Better: Stocks or Crypto?

Crypto and stocks are two distinct asset classes with unique characteristics and features. Stocks represent ownership in a company and are regulated by government bodies, providing a certain level of investor protection. They are valued based on company financial indicators and market trends and traded on centralized exchanges during specific hours.

Crypto, conversely, are digital assets based on blockchain technology. They are characterized by high volatility, 24/7 trading, and less stringent regulation. The crypto valuation includes analyzing on-chain metrics, technological value, and community sentiment.

Both forms of investment have their risks and potential benefits. Stocks offer more stable and time-tested investment opportunities, while crypto represents a new, dynamically developing area with high growth potential and innovation.

The choice between crypto and stocks depends on the individual investor’s goals, risk tolerance, and understanding of each asset class. It’s crucial to carefully study both options and understand their specifics and risks before making investment decisions. Portfolio diversification can be a sensible strategy for balancing both asset types’ potential benefits and risks.

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