In 2009, the world of finance and investing was irrevocably changed with the creation of the first decentralized payment system: Bitcoin, a digital currency with no formal ties to governments and no centralized control by a single entity. It has subsequently given rise to more than 12,000 cryptocurrencies, with 1,000 more entering the market every month.
Meanwhile, stocks and mutual funds have been around for ages, and they’re popular choices among investors and traders looking to rake in returns by speculating on prices. While cryptocurrencies, stocks, and mutual funds are great ways to generate income through trading or investing, several differences stand out from each other. let’s find out
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Cryptos, stocks and mutual funds
Stocks are considered traditional assets owned by an individual that provide holders with short-term or long-term returns. They signify ownership of a chunk or fraction of the company’s valuation, represented in the form of a share of a company. Mutual funds are professionally managed mutual funds composed of funds owned by investors with similar investment goals to purchase stocks, bonds, and other securities. It is generally chosen by people with limited knowledge and time to deal with the complexities of trading.
Meanwhile, cryptos are unlike any traditional asset. They are digital assets secured by cryptography and live over a blockchain. Cryptos like Bitcoin, Ethereum, Cardano, Litecoin, Matic, etc. serve different use cases and belong to different asset categories. For example, Bitcoin is a store of value while the Ethereum platform is for decentralized applications. Ether, its native token, is used to pay gas fees on the platform.
Crypto vs Stocks/Mutual Funds
While stocks and mutual funds are seen as more stable and safe, crypto is seen as a riskier counterpart that yields better returns as it is still a nascent asset. Crypto and stocks/mutual funds are all strong investment choices and are chosen by investors worldwide, but the former is very different from the traditional investment choices and serves different purposes in an investment portfolio. Cryptos are uncorrelated assets, offer a hedge against inflation and are a great way to diversify investments and create new revenue streams.
While stocks allow investors to earn through price appreciation and dividends, cryptos offer multiple revenue streams alongside price appreciation, including staking, yield farming, in-platform rewards, etc. Also, the cryptos come with a number of in-platform perks that the holder can enjoy while trading with them specific crypto platform.
Property
In order to buy shares, investors must open an account with a broker who trades shares on their behalf, and there is a lengthy formal process that requires investors to provide their brokers with personal information such as address and contact details.
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In the case of crypto, CEXs or centralized exchanges, users require that they complete their KYC before boarding. Additionally, CEXs use a variety of security checks to protect user assets. Crypto trading can also be completely anonymous on decentralized exchanges if the buyer does not reveal their identity as they keep their assets in a virtual wallet. There is less risk of fraud as cryptos can only be transferred from one wallet address. Because the data is immutably stored across a blockchain, the entire transaction history can be tracked and tracked.
Exchange
Stock trading is done on accredited exchanges like NSE and BSE through broker platforms like Zerodha. These brokers act as middlemen between the investor or trader and the exchange. Whereas in crypto trading only traders and the crypto exchanges like WazirX are involved. The disintermediation granted by crypto exchanges allows for comparative cost savings.
Also, crypto exchanges like WazirX keep a large portion of their user assets in cold storages and deploy multi-signature wallets along with regular security audits to ensure platform users have a safe and hassle-free trading experience. In India, most crypto exchanges operate with self-regulatory mechanisms as regulation is still ongoing. However, there are numerous countries that license exchanges. Given that it’s a much newer form of investing, crypto exchanges are still in their early stages and have a lot of room for improvement in terms of security and credibility building.
regulation
Due to government regulations (which often vary from country to country), companies that have sold stock to the public are required to disclose any information that could affect their stock value. This information helps investors make informed decisions about their portfolios.
On the contrary, crypto markets are largely unregulated, which leaves traders free to use their own wisdom when trading the crypto market. Investors need to do their own research by reading the news, joining online communities, and finding information about the founders of the blockchain platform. It is important to note here that as a largely unregulated entity, crypto markets have fewer safeguards for investors to ensure nothing goes wrong. While each country has taken it upon itself to enact laws and regulations to contain the growing markets, global regulators such as the FATF (Financial Action Task Force) have developed a universal rulebook for digital assets.
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Liquidity and Volatility
Stocks are perceived as largely liquid, while liquidity varies from crypto to crypto. Also, both companies can deal with slippage when an investor sells a large amount of an asset during periods of low liquidity, negatively impacting the overall market for the asset.
Additionally, both markets have their risks, but crypto is said to be more volatile as the market is still relatively new. However, it is evident that high risk means the potential for higher rewards. Crypto investors are known to make millions from their investments, with the famous Winklevoss brothers becoming billionaires due to their early interest and investment in Bitcoin.
The danger of events like Black Monday is always lurking in the minds of investors, which is why greater importance is attached to creating a robust, diversified portfolio. Crypto is often viewed as an effective hedge against a stock market crash because its price action is generally independent of other conventional assets. As such, it has proven to be an important part of a diversified portfolio to help offset the impact of a crash on another asset’s value.
It’s impossible to go online or to a social gathering today and evade the conversation about the rise of crypto. It’s a newer investment option with drastic differences from the traditional options of stocks and mutual funds, and many consider it a riskier choice. However, its increasing popularity over the past few years has allowed it to become something every investor would want in their portfolio, with around 106 million people investing in crypto today.
Are you planning to start your crypto journey? Buy your first crypto now with only Rs. 100 on WazirX!
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Also Read: What are Altcoins? Here’s everything you need to know
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