With the rise of mobile investment apps and the rise of online markets, it is easier than ever for people to start their own trading journey. A global trend of retail investment has emerged, fueled by digital culture and accessibility.
This is partly due to the industry-wide decision by major retail brokerages to cut their commissions to zero, which came as a natural progression perhaps of decades of regulatory policy.
Stocks and cryptocurrencies are generally considered liquid assets that are highly speculative and possess similar technical mechanisms and analysis. For example, you can send similar types of orders in both markets, including basic trading order types such as market, limit and stop loss.
Where they differ fundamentally is that a stock, also known as equity, is a security that represents ownership in a company or corporation and a proportional claim to its assets. Cryptocurrency is a purely digital asset that does not have any physical component.
A recent study found that 35% of retail investors in the United States believe that cryptocurrencies are more likely to offer gains than stocks, citing stock market risks as the reason why they prefer digital currencies. 30% of respondents said they prefer stocks over cryptocurrencies. In contrast, four out of ten UK retail investors do not consider stocks more favorable than cryptocurrencies.
So let’s take a look at the pros and cons of investing in cryptocurrencies versus stocks.
Ownership and Transportation
The main difference between investing in the stock market and the cryptocurrency market is the fundamental difference in what you buy.
While the stock market plays an important role in allocating resources, both directly as a source of funds and as a determinant of a company’s value and borrowing capacity, stocks represent only a fraction of the ownership in a company. This gives the owner the right to receive only a percentage of the company’s assets and profits, depending on the amount of shares they own.
Cryptocurrencies vary widely in how they are used. While cryptocurrencies allow for round-the-clock trading and minimal trades, their design means that investors own a coin, yet it does not represent a legal stake in the organization that issued it.
In addition, cryptocurrency markets offer instant and secure transfer of ownership through private electronic keys that do not require any paperwork. Private keys are an integral part of cryptocurrencies – they allow you to send and receive cryptocurrencies without requiring a third party to verify transactions.
These keys are part of the Public Key Cryptography (PKC) framework and cryptocurrencies use this technology to encrypt and decrypt transactions. Most PKC builds include computing power or computing power products in a quasi-commutative group.
More specifically, PKC is a method of validating transactions through asymmetric cryptography and this means that you can use private keys to send cryptocurrency to anyone, anywhere, anytime.
This cipher design of digital switchable representations prohibits copying or copying, resulting in a proliferation of available business use cases.
One of the distinguishing features of stocks is that they represent a tangible asset that supports your investment. A tangible asset has a transaction value, and while cryptocurrencies can be used to pay for goods and services, it remains a largely unregulated asset class.
Most governments and legal entities do not consider cryptocurrency to be legal tender. India is proposing a ban on private cryptocurrencies through a recent bill titled Cryptocurrency and Regulating Official Digital Currency 2021.
Likewise, China, the world’s second largest economy, has issued a ban prohibiting domestic financial institutions from dealing in or using cryptocurrency. This means that once the central government’s bill to regulate cryptocurrency comes into force in India, 2.8 billion people (more than a third of the world’s population) will not have access to cryptocurrency, limiting the scope of the industry at scale.
On the other hand, trading volumes for stocks and options have risen by leaps and bounds in recent years, with stock markets hitting an all-time high in February 2020.
For example, a mid-market investment bank and asset management firm like Piper Sandler traded 11.6 billion shares in 2020 alone, an increase of 149% over 2019. They also generated adjusted net revenue of $1.23 billion in 2020, an increase of 50 % compared to 2019 and adjusted net income of $178 million in the same year increased by 67% compared to the previous year.
This rally can be attributed to the pandemic-hit market volatility that may have brought new investors into the stock world.
Furthermore, 56% of Americans reported owning stock in 2021, according to data from Gallup. This is similar to the 55% average recorded in both 2019 and 2020, and the 55% average measured by Gallup since 2009.
By comparison, only 13% of Americans invested in cryptocurrency in 2021, according to a study published by the National Opinion Research Center at the University of Chicago.
James Royal, stock analyst, author, and chief correspondent at Bankrate believes that one of the main differences between stocks and cryptocurrencies is what underpins them.
“The stock’s performance is driven by the performance of the core business and is only partial ownership of the company,” Royal told Capital.com.
“As business expands, the value of the stock increases. In contrast, cryptocurrencies do not have a physical component and their price is paid entirely through speculation. For this reason, some of the world’s largest investors including Warren Buffett and Charlie Munger have condemned the cryptocurrency.”
Size and volatility
Amid growing public interest, the use of cryptocurrencies has proliferated in response to perceived problems within existing monetary and payment systems, which were highlighted, in particular, during the 2008 financial market turmoil.
This was demonstrated by the global market capitalization of all cryptocurrencies reaching $3 trillion for the first time in November last year, according to data from CoinGecko.
The total market capitalization of all cryptocurrencies grew from $500 million in December 2012 to $782 billion in December 2020, representing a compound annual growth rate (CAGR) of over 150%.
Investors seeking to determine the pros and cons of cryptocurrency trading versus stock trading can consider the volatility in the cryptocurrency markets.
“The momentum of crypto is reminiscent of the internet revolution and the invention of the World Wide Web in the 1990s,” Cole Jung, a cryptocurrency expert and engineer working in analytics and math modeling, told Capital.com.
“But we are still looking for 85% dumps for the biggest cryptocurrencies during a bear market, as opposed to a 20% retracement in the stock market.”
One explanation for the high volatility is the difference in volume between the stock and cryptocurrency markets. The US stock market, for example, worth $53.37 trillion in 2021, can be imagined as an ocean. The cryptocurrency market, which has a total market capitalization of $2 trillion (at the time of writing, January 12), is a lot like a pond.
However, there may be more factors that play a role with individual cryptocurrency variances, but also variances and conditional correlations that contribute to volatility. Cryptocurrency CFDs are variance characteristics in terms of upward and downward price trends, with conditional variances associated with movements in the markets.
For example, a report by the University of Sheffield School of Management shows that cryptocurrency spreads and correlations are subject to various macroeconomic factors such as news.
In their study, the news about China’s ban on bitcoin trading was found to have an impact on the volatility of bitcoin (BTC) and litecoin (LTC) prices, as well as on the modal correlations of all cryptocurrency pairs.
Also, unlike direct purchase, additional tax complications arise when cryptocurrency is acquired through mining activities because there is still debate as to whether mining proceeds fall under diversified income or are taxed as business income.
On the other hand, US stocks are generally regulated by the Securities and Exchange Commission (SEC) and margin requirements are often strict and closely monitored.
Moreover, since 1926, stocks of large corporations have produced average annual returns of over 10%. Another boost to stocks in the stock trading versus cryptocurrency trading debate is that the latter usually grants holders certain entitlements such as voting rights or a portion of the issuer’s earnings in the form of dividends.
questions and answers
Read more: How to predict the price of cryptocurrency using fundamental analysis
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The difference between trading assets and contracts for difference
The main difference between trading CFDs and trading assets, such as commodities and stocks, is that you do not own the underlying asset when you are trading a CFD.
You can still profit if the market moves in your favour, or incur a loss if it moves against you. However, with traditional trading, you enter into a contract to exchange legal ownership of individual shares or commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of your CFD trade in order to open a position. But with traditional trading, you can buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there are fees when buying shares, for example.
CFDs attract overnight costs of making trades (unless you use 1-1) leverage, making them more suitable for short-term trading opportunities. Stocks and commodities are usually bought and held for a longer period. You may also pay a commission or broker fees when buying and selling assets directly and you will need a place to store them safely.
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