The number of asset classes is increasing in the past few years. Cryptocurrencies have become the latest asset class in the industry with over $1.8 trillion in assets. Other popular asset classes are bonds, commodities, stocks, and even indices.
In this crypto vs stocks article, we will look at the two and identify which one offers better opportunities for your trading career.
Let's start with a brief introduction of the two assets.
What are cryptocurrencies?
The concept of cryptocurrencies has been around for decades. However, it was actualized in 2009 by Satoshi Nakamoto, who introduced the first digital currency in the world. Since then, the crypto industry has become extremely vibrant with over 18,000 cryptocurrencies that have a market cap of more than $1.8 trillion.
There are different types of cryptocurrencies. For example, there are peer-to-peer digital coins like Bitcoin and Litecoin. Further, there are privacy-focused coins like Monero, Dash, and Decred. In addition, there are meme coins like Shiba Inu and Floki Inu. There are also digital governance tokens like UNI, LINK, and AAVE.
Another classification of cryptocurrencies is in proof-of-work (PoW) and proof-of-stake (PoS). PoW refers to coins that are mined by solving complex mathematical challenges. PoS, on the other hand, are coins that are created using validators.
What are stocks?
Stocks are shares of publicly-listed companies. Companies go public in a bid to raise capital from a large pool of people. These people can then buy and sell their shares through online brokers like Robinhood and Schwab.
The number of publicly-traded companies has been in a strong upward trend in the past few years. Today, there are more than 4,000 public companies in the US. It is estimated that these companies have a market capitalization of more than $50 trillion. Globally, the total market value of stocks is worth more than $93 trillion.
» Related: How to Analyze Stocks for Day Trading
Difference between stocks and cryptocurrencies
There is a wide difference between stocks and digital currencies. Let's go over some of the properties that best help us understand this difference.
First, a stock represents ownership of a company. For example, assume that a company has a total market cap of $1 million and you buy shares worth $10,000. In this case, you own about 1% of the company. Cryptocurrencies, on the other hand, do not represent ownership of a company.
Second, with stocks, you have ownership of a company, meaning that you should have access to the firm’s profit. This profit is usually distributed to shareholders through dividend payouts or share repurchases.
In digital currencies, you can make money as the price of the coin rises. Some coins allow you to make money in the form of staking rewards.
Third, stocks are guided through strict regulations. In the US, publicly-traded companies are regulated by the Securities and Exchange Commission (SEC). These firms are required to provide regular disclosures to their shareholders. These disclosures include earnings, insider purchases or disposals, and annual reports, among others.
Cryptocurrencies are loosely regulated and their creators are mostly not known to their investors. Also, they are global in nature since listing them in major exchanges is a relatively easy process.
Crypto vs stocks trading
To a large extent, trading stocks and cryptocurrencies is almost the same. For one, traders use concepts of fundamental, technical, and price action analysis.
In fundamental analysis, one looks at key internal data of both stocks and cryptocurrencies. For example, in stocks, you can look at earnings and user growth. On the other hand, in cryptocurrencies, you can focus on things like total value locked (TVL) and ecosystem growth.
In technical analysis, you focus on chart analysis, where you incorporate indicators like moving averages and the relative strength index. With price action analysis, you look at chart and candlestick formations.
As mentioned, regulations are an important part of the market. Since the stock market has been around for years, there are solid regulations that guide the industry. Some of the most popular stock trading regulations are:
- Pattern Day Trader (PDT) - This is a rule that governs your classification as a trader. In most cases, a pattern day trader must maintain a minimum equity of $25,000 in their trading account.
- Truth in Securities law - This law was passed in 1933 to ensure that investors receive accurate information from companies.
- Securities Exchange Act - The rule was passed in 1934 and established the SEC. Some of the notable introductions are corporate reporting, insider trading, and exchange registrations.
- Investment advisors act - This is a law that regulates investment advisors. For example, it stated that advisors should be compensated.
There have been other laws in the industry like the Sarbanes-Oxley Act, Dodd-Frank and the Wash Sale Rule.
On the other hand, cryptocurrencies have few regulations since they are a relatively new asset class. This lack of regulation has led to many situations. For example, there have been many cryptocurrency scams around. There have also been cases of pump and dump schemes in the industry.
» Related: Simple Ways to Avoid Day Trading Scams
Pros and cons of crypto vs stocks
There are several benefits of both stocks and cryptocurrencies. First, digital coins have the benefit of being global in nature. This is unlike stocks where it is difficult for people in Europe to trade American shares and vice versa.
Second, there are more cryptocurrencies that one can trade. There are over 18,000 coins while fewer than 5,000 stocks are listed in the US. Further, cryptocurrencies have a degree of volatility than stocks at times.
On the other hand, there are multiple pros of stocks trading. For example, stocks have multiple catalysts such as management change and earnings. Also, stocks are well-regulated, which prevents some bad actors.
Why stocks are better?
To some extent, stocks are better than cryptocurrencies. There are clear regulations about the industry, which helps to prevent bad actors. Second, there tend to be fewer scams in the stocks industry than in cryptocurrencies.
Further, the public disclosures help to ensure that investors and traders have all information they need about firms.
Additionally, there are more types of stocks that you can trade or invest. There are small, large, and mega-cap stocks. There are also companies in different sectors of the economy such as technology and consumer staples.
In addition to stock type, there are also many areas in which a trader can move. He can, for example, take advantage of the correlation principle to trade two similar stocks, or two that move in opposite directions to mitigate risk.
Alternatively, he can completely diversify his portfolio to avoid a crash in a particular sector.
In this article, we have looked at the two most important asset classes in the market. We have explained what cryptocurrencies are, and how they work, and identified some of the most important features of both.
As we explained in the last part of the article, if you plan to start a career in trading, our advice is to focus on stocks. Your activity as a trader must be sustainable!
So you need to make sure that your account is safe with proper risk management. Not that stocks are 100% safe - we remind you that not many traders are successful - but you'll take much less risk than with cryptocurrencies.
External useful resources
- Is Cryptocurrency a Good Investment? - The Motley Fool