The success of Bitcoin jumpstarted a new industry that has ramified into dozens of sectors such as finance, healthcare, supply chain, and many more. Cryptocurrencies have established themselves as a high-risk, high-performance asset that provides newfound financial freedom on a global level.
Meanwhile, the stock markets have seen their fair share of innovations. Trading apps like Robinhood and Webull enables retail access to opportunities previously reserved for the elite.
As a consequence, new investors are joining the markets, asking themselves what type of asset is more suitable for their portfolio. For this reason, we decided to do an honest cryptocurrency vs stocks comparison by giving a quick overview of both markets and list their main differences.
We will also discuss some major recent events that might have permanently disrupted the stock market and what that means for the future of finances.
After reading this article, you will have a pretty good idea of which one between cryptocurrency vs stocks is the better investment for you.
- Stock market definition
- Cryptocurrency market definition
- Stocks vs Crypto differences
- Crypto trading vs stock trading – which is better?
Stock market definition
The stock market is the conglomeration of all the marketplaces where company stock can be issued and traded.
To buy or sell the shares offered on the market, individuals have two options:
- A network of regulated and centralized exchanges – such as the New York Stock Exchange or the Nasdaq. These can be either physical or electronic.
- Over the counter (OTC) broker networks – that can offer equities that aren’t listed on regulated exchanges.
- Brokerage and investing apps – that allow small investors to profit from the markets without getting registered on an exchange.
All developed countries in the world have a governmental financial institution that regulates their regional stock market. To make their shares available to the public, companies go through a process called an initial public offering (IPO). After the relevant government entities audit their business, exchanges can list their shares and put them on sale.
This sale of company shares has two main purposes:
- It provides liquidity and cash capital to companies in exchange for the equity of their company. This allows them to grow without having to request loans and pay interest.
- It provides profit opportunities to investors. They can either sell their company shares for profit or receive dividends on a regular basis.
Stock exchanges usually list thousands of different companies and are difficult to track separately. Consequently, traders use indexes such as the S&P 500 or the Nasdaq 100 which regroup relevant companies and represent the performance of the entire market.
Cryptocurrency market definition
The cryptocurrency market is comprised of all the exchanges where crypto-assets can be bought, sold, or exchanged for each other.
The decentralized nature of cryptocurrencies allows individuals to trade them via a wide array of options:
- Cryptocurrency exchanges – which are platforms that facilitate the exchange of cryptocurrencies by matching buy and sell orders between individuals. These can be either governed by a single entity (centralized), or smart contract-based (decentralized).
- Peer-2-peer escrow exchanges – which connect crypto users willing to exchange their assets and act as a trusted intermediary.
- Brokerage exchanges – which allow you to buy or sell a selection of top cryptos for FIAT money.
In contrast with the stock market, there’s no government body that can regulate the issuance of cryptocurrencies. Anyone can release their own crypto, and exchanges can choose to list them at their own discretion.
Traders can track the cryptocurrency market performance through online platforms such as CoinMarketCap or CoinGecko. These websites cross-check all the cryptocurrency exchanges and list a median price and trading volume for each coin on the market.
Stocks vs Crypto differences
To understand which one is better between the cryptocurrency vs stocks markets, we need to elaborate on their differences.
Stocks vs Cryptocurrency issuance
As we previously mentioned, stocks must be issued through an IPO and pass through careful scrutiny before regulated exchanges decide to list them. And once the initial number of shares has been sold, companies can release additional shares on the markets, which might dilute their value in the long run.
On the other hand, any company or individual can issue their own cryptocurrency. However, most coins have a limited maximum supply that is hard-coded in their protocol. As a result, they become increasingly scarce over time and may appreciate in value.
Cryptocurrency vs Stocks ownership
Stocks represent a share of the company that issued them. When you own stock, it means that you own a piece of that business which entitles you to a part of their profits. With that said, proving this ownership can be tricky, as you need the paper shares in your possession.
Conversely, cryptocurrencies do not represent company value but are speculative assets similar to commodities like gold. However, they offer full ownership thanks to the cryptography upon which they are based. You only need access to your private keys to fully control your funds at any time.
Crypto trading vs stock trading – which is better?
To have a better idea of which asset is better between cryptocurrency vs stocks, let’s explore some important real-world scenarios and events.
Market manipulation and instability – the case of Gamespot
If you are remotely interested in finances, you must have heard about the WallStreetBets saga by now. This story involving a group of retail traders from Reddit that disrupted the Wall Street stock market has been all over the news lately.
How it started
A number of big-player hedge funds and institutional investors had placed large short positions on brick-and-mortar company stock Gamestop (GME). When initiating a short sell, these institutions bet on the GME stock to drop in value considerably and make profits from that bet.
Here’s how that works:
- The short-seller borrows a number of shares they believe will drop in price.
- Sells the stocks at the highest price possible.
- Waits for the price to drop and buys the shares back at a low price.
- Returns the borrowed shares and pockets the difference.
However, if the market doesn’t go in their direction, the seller must buy back at a higher price and can register severe losses. Additionally, once the buyback happens, the prices can go higher even further.
WSB calls the bluff and initiates a short squeeze
A group of Redditors from the trading subreddit WallStreetBets saw this as an opportunity to beat institutional investors at their own game. Thanks to trading apps such as Robinhood, this group of retail traders initiated what is called a “short squeeze”.
WSB coordinated to massively buy GME stock, driving the price up by more than 1000%, from $45 to $450 in just a couple of days. This forced hedge funds and short-sellers to close some of their position at huge losses. For instance, Melvin Capital lost more than $4.5 billion in the process triggering a $2.8 billion bailout from investment firm Citadel.
WSB continued their run versus the Wall Street big players by attempting other short squeezes on pumping the prices of AMC (310%) and a few other companies.
How was the market manipulated?
However, while most mobile trading apps suffered some outages during the buying frenzy, there was a more important issue at hand.
Following institutional and clearinghouse pressure, many retail trading apps including Robinhood and Interactive Brokers restricted GME and AMC stock trading to only selling. This caused an outrage in the trading community, triggering calls for a class-action lawsuit.
While brokers gradually lifted these restrictions in the following days, the damage was already done. The move interrupted the squeeze and the price of GME and AMC stocks couldn’t be pushed further up.
Moreover, it caused retail investors to panic sell and trigger long margin calls. As a result, the price of GME fell from an ATH of $450 down to $50 in just a few days.
But the market manipulation didn’t stop there. An increasing number of official and unofficial statements tried to sway public opinion in favor of Wall Street:
- Nasdaq CEO issued a statement that they would be monitoring and halting trading in case such an “attack” was to occur again.
- The SEC issued a public statement warning about market manipulation from retail traders, allegedly to protect them from extreme volatility.
- Sen. Elisabeth Warren called out regulators to “come out and do their jobs” in a CNN interview.
With that said, Wall Street traders are notorious for exploiting high volatility to make profits. It’s symptomatic that officials were suddenly triggered into debates about regulating the stock market once the game shifted in retail investors’ favor.
Rarely did the mainstream media address the core problem – the massive short-selling of stocks, driving companies out of business for profit.
The Gamespot debacle has shown us that retail investors are not welcome in traditional stock markets. The free market is just an illusion, and institutional investors will do everything in their power to keep it under control.
It’s one of the main reasons why you should pick crypto when facing a choice between crypto trading vs stock trading. Unlike stocks, retail investors drive the cryptocurrency market. Massive shorting mechanisms like those on stock markets simply don’t exist and the game isn’t entirely rigged against one party.
Furthermore, decentralized finance and exchanges powered by smart contracts can ultimately fix manipulation. Due to its nature, DeFi cannot be fully regulated, which prevents big players and governments from closing just one side of the market.
Have a look at the video below, where Cameron and Tyler Winklevoss debate on the subject and the importance of crypto for the future of the financial world.
Risk and volatility
Both crypto and stock markets are considered to be quite volatile. However, compared to one another, crypto-assets show much bigger price fluctuations in short periods of time.
For instance in our chart below we can see the Ethereum price compared to Tesla, which is considered to be an extremely volatile stock.
We notice that ETH’s price varies much more drastically, with regular 30% price swings, compared to Tesla’s 2-5%.
Often, this high volatility is considered as a negative event. However, while it can drive people away from adopting crypto for daily transactions, it offers an incredible opportunity for increasing the value of your portfolio.
Experienced traders thrive in the crypto markets thanks to this volatility, as they are able to make huge profits from price swings.
While stock can be perceived as a safer investment, the crypto volatility can be mostly ignored if you have high risk tolerance and a good investment strategy.
Crypto trading 24/7 or stock trading in sessions
The timeframes when these assets can be traded are an important thing to consider when comparing cryptocurrency vs stocks.
Stock markets work in sessions and are open during a set number of hours. This means that investors can close their trades before the end of the day and isolate themselves from erratic off-hours market movements.
Comparatively, cryptocurrency exchanges remain open around the clock. Traders can use every opportunity to make profits and grow their portfolio value considerably. At the same time, remaining in a constant FOMO state and trading non-stop can be extremely stressful.
Overall Cryptocurrency vs Stocks performance
Finally, to decide which one between cryptocurrency vs stocks is better, we should compare the performances of both markets and their potential for profits.
Comparatively, cryptocurrencies have been outpacing the stock market by a 10:1 ratio. In 2020 alone, the market cap of crypto increased by 495% whereas the Nasdaq 100 index shows a growth of 31%.
When looking at longer timeframes, the advantage of crypto is even more obvious. For instance, Bitcoin has gained more than 10 million % in value since it was released in 2009.
The facts we stated in this article allow us to easily choose cryptocurrency vs stocks as the better investment. To come to this conclusion, we:
- Defined both markets and stated their main differences.
- Unveiled some crucial aspects such as:
- Market manipulation
- Risk profile and volatility
- Overall performance
Recent events such as the Gamestop fiasco point out to extreme manipulation of the stock market by institutional participants. Decentralization and cryptocurrencies could be a clear answer to this problem, allowing a free market for everyone.
With that said, the final answer might be in diversifying your portfolio. By spreading your assets, you can avoid exposing yourself to the performance of a single market while simultaneously maximizing your profits.