To create a sound investment portfolio, first assess the best strategies you can take with your assets. Many different assets are currently available in the market, so it is vital to research the pros and cons of each one and how they perform against each other before taking the plunge and placing your money on a particular investment.
Cryptocurrencies and stocks are two of the most popular investment instruments in the market today. Last year CNBC reported that one in ten Americans have invested in crypto, while about 18% are willing to put more money into stock investments this year. Today, we'll discuss the merits of crypto and stocks, their differences, and why you should use both to strengthen your portfolio.
Differences between crypto and stocks
Cryptocurrencies are digital currencies that are powered by blockchain technology. As a medium of exchange and store of value, they only gained popularity in the past decade. Cryptocurrencies are maintained on decentralized computer networks spread worldwide, and their value is driven by market supply and demand.
Stocks, on the other hand, are more traditional forms of securities. They represent fractional ownership and legal interest in a business. A stock's value reflects a company's performance, while a company's cash flow and assets provide the basis of a stockholder's investment.
It's important to understand the volatility of both investment assets. Volatility refers to periods of unpredictable and sharp price movements, both upwards or downwards. Maryville University reports that volatility is a hallmark of cryptocurrency, with abrupt changes in value over a short period of time. The university notes that in 2021, the value of Bitcoin, one of the most popular cryptocurrencies, ranged from $28,000 to more than $65,000.
Likewise, the institution points out that stocks can experience sudden and rapid changes in stock prices. Extreme sale days such as Black Friday and Black Monday demonstrate how stock markets can plunge downward in just one day. Massive potential for quick gains for highly volatile securities could also mean an increased risk of dramatic losses.
Time horizon is an essential consideration in choosing which instrument to invest in. Time horizon refers to the duration you need to gain from an investment. Often, volatility plays a vital role in determining your time horizon. The shorter your timeline, the safer your asset will be from market volatility. Some stocks are a better fit for aggressive investors that wish to make quick gains, while other stocks grow in value over a long period and are suited for those who want to exchange their value upon their retirement.
Cryptocurrency, on the other hand, is extremely volatile. They are said to be better investments for traders who can leave their money tied up and ride out the volatility to wait for their investment value to recover.
Why should you choose both crypto and stocks?
Cryptocurrency is generally accessible because anyone with an internet connection can invest, and depending on the cryptocurrency, more resistant to inflation and censorship. Compared to stocks, crypto holdings can be grown in many different ways aside from trading.
Potential investors can also choose from various tokens, and we've covered in a previous blog post factors to consider in selecting a good cryptocurrency. One example we provided is the fast transactions Solana delivers in comparison to ETH, and this can enable it to capture a lot of ETH's market share. But, as mentioned earlier, crypto is vulnerable to extreme volatility, and knowing how novel an instrument it is, there are no guaranteed long-term returns.
Stocks are likewise becoming increasingly accessible, with many platforms and mobile applications emerging online. Because governments generally regulate the stock market, there are mechanisms for protection that investors can use. Potential investors can choose from a wide variety of stocks across different industries and sectors. Time's Next Advisor did a feature on different types of stocks, such as blue-chip stocks, penny stocks, IPO stocks, growth stocks, and value stocks. However, these come with high brokerage fees and commissions for purchasing or selling stock investments.
Both stocks and crypto have pros and cons that make them suitable for certain investors. Choosing one over the other ultimately depends on your risk appetite, your preferred time in the market, and your ability to weigh the risk and rewards of each option. But, good investors know that diversifying their portfolios and getting exposure to both crypto and stocks strengthens your portfolio and allows you to bear any risk of loss safely.
Written for Hedgehog.app by Jane Brooks, CC BY-ND 4.0 license.
Jane Brooks is a San Francisco-based freelance writer specializing in fintech. She has a keen interest in venture capital and is passionate about financial literacy. When she's not working on a new piece, Jane collects NFTs and hikes trails around the Bay Area.