Cryptocurrency Vs. Stocks
Cryptocurrencies are digital currencies that have no physical form. They are not backed by anything tangible like gold or silver. Stocks are shares of companies that are traded on stock exchanges. These stocks are usually issued by large corporations.
From Elon Musk to El Salvador, cryptocurrency has been causing quite a stir. While Bitcoin may be generating much of the conversation regarding the financial possibilities of cryptocurrency, a variety of other cryptocurrency options are entering the market as financial and investment instruments.
For those looking to diversify their portfolio or who just want to take advantage of this opportunity, it may seem like a great time to invest.
But does cryptocurrency stand up to the hype and is it a better investment than investing in the stock market? The following considerations may help you decide whether cryptocurrency or stocks are a better investment.
what is cryptocurrency
Cryptocurrency, a term that has rapidly gained prominence in recent years, refers to digital or virtual currencies secured by cryptography. Unlike traditional fiat currencies issued and regulated by central banks, cryptocurrencies operate on decentralized networks based on blockchain technology. This innovative form of digital money has revolutionized the financial landscape by providing individuals with greater control over their finances and eliminating the need for intermediaries such as banks for conducting transactions.
The roots of cryptocurrencies can be traced back to 2008 when an individual or group using the pseudonym “Satoshi Nakamoto” published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This marked the birth of Bitcoin (BTC), which became the first successful implementation of a cryptocurrency. Following Bitcoin’s groundbreaking introduction, numerous alternative cryptocurrencies emerged, often referred to as altcoins.
Types of Cryptocurrencies
The world of cryptocurrencies is an intricate and fascinating one, offering a diverse range of digital assets with unique characteristics and purposes. Understanding the various types of cryptocurrencies is essential for anyone seeking to delve into this revolutionary realm. At their core, cryptocurrencies are decentralized digital currencies powered by blockchain technology, but each cryptocurrency possesses its own distinct features that separate it from others.
Bitcoin: The Pioneer Cryptocurrency
Bitcoin stands proudly as the trailblazer in the realm of cryptocurrencies. It was introduced in 2009 by an enigmatic figure known as Satoshi Nakamoto.
Bitcoin’s genesis marked a significant milestone, as it unveiled a decentralized peer-to-peer electronic cash system that eliminated the need for intermediaries such as banks. The development of Bitcoin has been driven by a community of passionate individuals who firmly believe in its potential to revolutionize finance.
Over time, Bitcoin has gained widespread recognition and acceptance, establishing itself as the most dominant cryptocurrency in terms of market capitalization and adoption. What sets Bitcoin apart is its scarcity and security.
With a limited supply capped at 21 million coins, Bitcoin becomes increasingly valuable due to its deflationary nature. Additionally, Bitcoin operates on a robust cryptographic algorithm called SHA-256, ensuring secure transactions and protecting against counterfeit attempts.
Altcoins: Diverse Range of Alternative Cryptocurrencies
Beyond Bitcoin’s pioneering success lies a vast landscape of alternative cryptocurrencies known as altcoins. These digital assets emerged with hopes to address specific limitations or introduce novel functionalities not found in Bitcoin.
Ethereum stands out among altcoins due to its innovative smart contract capabilities. By enabling developers to build decentralized applications (DApps) on its blockchain platform, Ethereum has opened up new possibilities for sectors like finance, supply chain management, and gaming.
Litecoin, often referred to as the silver to Bitcoin’s gold, differentiates itself through its quicker block generation time and a different hashing algorithm called Scrypt. These features aim to enhance transaction speed and efficiency, making Litecoin a popular choice for everyday transactions.
Ripple, on the other hand, targets seamless cross-border transactions for financial institutions. Its blockchain technology facilitates swift and cost-effective transfers of both fiat currencies and cryptocurrencies.
This is just a glimpse into the vast array of altcoins available in the market. Each alternative cryptocurrency boasts its unique features and uses cases, catering to specific demands within various industries or communities.
Cryptocurrency Technology Explained
Blockchain: The underlying technology behind cryptocurrencies
Cryptocurrencies are built upon a revolutionary technology called blockchain. A blockchain can be visualized as a decentralized, transparent, and immutable digital ledger that records all transactions across a network of computers. Each transaction, known as a block, is linked to the previous one, forming a chain of blocks.
This ensures that every transaction is traceable and cannot be altered without consensus from the network participants. The blockchain’s distributed nature eliminates the need for intermediaries like banks or governments to validate and process transactions.
Explanation of how blockchain works
To understand how blockchain works, imagine a network where multiple computers, often referred to as nodes, maintain copies of the same database. When a new transaction occurs, it is broadcasted to all the nodes in the network.
Each node then independently verifies and validates the transaction using complex mathematical algorithms. Once verified, the transaction is bundled with other validated transactions into a block.
This block is then added to the existing chain of blocks by solving a cryptographic puzzle. This process requires significant computational power and ensures that each block is created through proof-of-work (PoW) or proof-of-stake (PoS) mechanisms, depending on the specific cryptocurrency’s design.
Role in ensuring transparency, security, and immutability
One of the most remarkable aspects of blockchain technology is its ability to ensure transparency while maintaining security and immutability. Transparency arises from each node having access to an identical copy of the blockchain ledger in real time with complete visibility into past transactions.
The security aspect stems from cryptographic techniques used within each block and between blocks in creating this unalterable digital record. The robustness of these cryptographic algorithms makes it nearly impossible for malicious actors to manipulate past transactions or tamper with existing records without being detected by the network.
Furthermore, the decentralized and distributed nature of blockchain technology makes it resistant to single points of failure or attacks. By eliminating the need for a central authority, blockchain reduces vulnerabilities and enhances security.
Mining: The process that powers cryptocurrency networks
Mining is a vital process in most cryptocurrency networks that allows new transactions to be added to the blockchain and maintains network integrity. Miners are responsible for validating transactions, solving complex mathematical problems, and adding new blocks to the chain.
Proof-of-work (PoW) and proof-of-stake (PoS) are two common consensus mechanisms used in mining processes. PoW requires miners to compete against each other by solving intricate computational puzzles before adding a block.
This competition ensures fair distribution of rewards and makes altering past transactions exponentially costly. On the other hand, PoS allows participants to mine new blocks based on their existing stake in the network.
They are chosen based on how many coins they possess or hold in their digital wallets. Compared to PoW, PoS consumes less energy but still ensures network security through economic incentives tied to ownership stakes.
The mining process not only validates transactions but also increases the overall security of a cryptocurrency network by making it computationally expensive for an attacker to manipulate data stored within the blockchain. However, it is important to acknowledge that mining can have significant energy consumption implications which have led some cryptocurrencies to explore more environmentally friendly alternatives such as proof-of-stake (PoS).
Volatility
Bitcoin, which currently dominates half of the cryptocurrency market, has seen a dramatic rise since its initial offering in 2009, rising in value to $68,990 by the end of 2021.
At the same time, bitcoin is considered an extremely volatile currency that has lost 30% of its value in one day. One of the challenges with cryptocurrencies like bitcoin is that they have no intrinsic value as they are not backed by any assets, such as minerals or cash, nor are they recognized as an official currency by any national banks, with the exception of El Salvador.
Because of this lack of intrinsic worth, they are subject to unpredictable, volatile price swings; depending on when you buy into the cryptocurrency market and if you sell off your holdings, you could make or lose a lot of money.
The stock market is not independent of volatility, either. For example, stocks dropped roughly 30% in March of 2020 due to the COVID-19 pandemic and concerns over economic effects and public health fallout.
The stock market has since rebounded, though it is still subject to daily volatility relative to individual stocks. Over time, the stock market has steadily increased in value, which is why stocks remain a go-to investment option.
More importantly, stocks are part-ownership contracts and investments in a company, which provide tangible value based on a company’s performance.
Unlike bitcoin or other cryptocurrencies which are speculative investments based on the potential use as future currency in large-scale transactions, owning stocks offers some guarantees, as long as a company continues to exist, that that stock is valued by other investors.
Diversity
There are over 18,000 different cryptocurrencies, with popular alternatives to Bitcoin being Ethereum, dogecoin, and Monero. These cryptocurrencies have different values influenced by their market capitalization and their popularity, with Bitcoin currently being the most highly valued currency.
Today, there are roughly 6,000 different companies that trade on the New York Stock Exchange and the Nasdaq; international stock exchanges, such as the Shanghai Exchange or London Stock Exchange, offer access to additional companies.
Similar to cryptocurrencies, stocks come in a variety of different classes and valuations, though economic factors such as interest rates and inflation have a greater influence on stock values than popularity and speculation.
Security
On the one hand, cryptocurrency offers a vastly improved level of digital commercial activity dependent on the blockchain authorization process.
With no centralized network to store digital transactions, each member of the blockchain offers a certain level of security relative to the entire network such that the entire network can’t be compromised.
Likewise, account and password authentication add an additional level of security relative to accessing accounts and purchasing currency. At the same time, cryptocurrency has not been immune to hackers and, in the event that cryptocurrency is stolen, there is no way to compensate for the loss since it doesn’t provide any tangible alternative.
Most importantly, because it is not a regulated currency, a variety of scam cryptocurrencies exist, in addition to phishing attempts that can solicit private information relative to cryptocurrency purchases.
A certain level of due diligence and cybersecurity, such as a sufficient digital wallet, is necessary to secure one’s cryptocurrency purchases.
Stocks offer much greater security relative to cryptocurrency. Stocks are regulated by the Securities and Exchange Commission with a variety of laws and regulations intended to limit speculative and illegal trading.
These regulations don’t limit the inherent volatility of stocks relative to market pressures but do substantially reduce investments in poorly-financed companies.
Stocks do require a certain level of transparency relative to investing through a brokerage, while cryptocurrency accounts allow private investors to purchase and trade their currency independently.
Short-term value: stocks vs. cryptocurrency
Because cryptocurrency experiences such unpredictable volatility with so many unproven currencies constantly entering the market, stocks offer much greater predictability for investors interested in short-term trading (holding stocks for less than a year).
While there will always be certain volatility, expenses, short-term trading based on economic volatility, inflation, interest rates, and worldwide spending patterns offer much greater predictability, particularly when paired with company performance.
For those looking to trade regularly on a short-term basis, stocks have the potential to earn more consistent returns.
Long-term Value
The future is uncertain, which is why cryptocurrency continues to generate appeal. With greater investment in cryptocurrencies, investors hope that banks and companies will continue to recognize its legitimacy and adopt cryptocurrency as a legal tender.
Because of its future potential and the value that various currencies, such as Bitcoin and Ethereum, have achieved to date, there is still considerable investment potential with regard to cryptocurrencies.
At the same time, stocks continue to offer certain advantages. First, established companies provide dividends relative to shares purchased, which adds an additional income stream without having to sell stocks.
Second, the stock market continues to increase in value, with different funds, such as index funds, providing greater long-term gains than short-term or speculative trading.
While stocks don’t have the potential to realize the same gains as cryptocurrencies relative to their introduction, they still have the potential to achieve considerable gains over a long-term period.
When it comes to investing, the adage to not put all one’s eggs in one’s basket remains relevant. Investing entirely in cryptocurrency would be an unwise choice given that it remains a speculative investment option with a considerable possibility to experience substantial losses.
However, cryptocurrency does possess market value relative to investor enthusiasm, which, though irrational, can considerably influence the value of various investment instruments.
For those deciding between cryptocurrency and stocks, pursuing a balanced and conservative strategy may help to satisfy the desire for either investment option.
