How Cryptocurrencies Compare to Stocks

Also known as equity, a stock represents the total ownership of a company. Imagine you started a coffee business. In some years, you grew it into a chain of shops, operating in multiple cities. Then, you needed more financing to expand to other countries so you decided to do an initial public offering (IPO), making your private business a publicly traded company on a stock exchange. When an investor buys shares in your company, they become entitled to a proportionate part of its assets and profits.

Stocks vs. Crypto (Source: Medium)

Cryptocurrencies are a novel type of investment. They are digital currencies developed using the principles of cryptography such as Digital Signatures, Merkle Trees, and Proof-of-Work (also known as mining) to make transactions conducted with them decentralized, trustless, immutable, and secure. Bitcoin, invented in 2008 and first used in 2009, is the foremost cryptocurrency. Other cryptocurrencies besides Bitcoin such as Ethereum, Dogecoin, and Chainlink, are known as altcoins. Today, the altcoins in existence are estimated to be more than 5,000.  

Digital Signatures ensure that users can instantly clarify transactions to be authentic, Merkle Trees, using the technique called hashing, stack processed transactions together into chains of blocks while Proof-of-Work ensures that every transaction added to a chain is authentic. These chains of blocks make up the Blockchain, a decentralized, distributed public ledger managed as a peer-to-peer network. 

Stock vs. Cryptocurrencies: Returns and Risks

Bitcoin, the foremost cryptocurrency, is always in the headlines for its intermittent swings in price. For a decade, it has been the best-performing asset – having generated an average annualized return of 230%. The second-ranked Nasdaq 100, at an annualized return of just 20%, did not even come close. Over the same period, stocks of U.S.-based companies with market capitalizations of over $10 billion, posted an average annual return of 14% while those with market capitalizations of between $300 million and $2 billion, the small-cap stocks, reported an annualized return of just 12.9%.  

Since the beginning of 2021, Bitcoin has been up over 100%. On Tuesday, April 13, it surged to hit an all-time high of $63, 729.5. However, despite the impressive performance of Bitcoin, it has also been shielding many investors from altcoins such as Ripple and Stellar that even intermittently outperform it sometimes. That said, what are the risks involved in investing in cryptocurrencies and stocks? 

First, cryptocurrencies are highly volatile – far more volatile than stocks. For example, while stock markets have set thresholds, known as circuit breakers or trading curbs, beyond which they cannot rise or decline.  The price of a cryptocurrency can drop by hundreds or even thousands. Moreover, stock exchanges have regulatory oversights. The New York Stock Exchange, the largest stock market in the world, is regulated by the U.S. Securities and Exchange Commission (SEC). Cryptocurrencies, on the other hand, are still largely unregulated. Also, cryptocurrencies, being highly speculative products, are more susceptible to higher charges, gapping (also known as slippage, resulting from the high volatility associated with them), and a type of risk known as project risks which include hacking and theft.

Finally, so, are cryptocurrency holders subject to taxes? And, are cryptocurrency profits taxable? In both the US and the UK, just like stocks and bonds, cryptocurrencies are taxed as “property.” In the U.S., depending on whether you are single or married, you can incur 0%-20% long-term capital gains tax rates on your investments, and may also have to pay income tax when you are paid with cryptocurrency.   

5 Tips for Investing in Stocks and Cryptocurrencies

Cryptocurrencies are a good investment, so are stocks. Thus, whether you want to invest in stocks or cryptocurrencies, or both, the following tips would be helpful for you: 

  • Understand the risks
  • Analyze before you buy
  • Use a stop-loss
  • Always stick to your investment plan 
  • Diversify across various coins and/or stocks

The information on this website and all associated literature are for educational and informational purposes. It does not constitute a fiduciary duty or obligation between Uncut Lab and you. Please consult your financial and investment professional for your specific situation.

author

Lucas

I am the Uncut Lab resident cloud computing junkie. I help curate the written content in our Education Corner, providing engaging articles on foundational concepts in cloud computing, data analytics, machine learning, and blockchain technology. Feel free to reach out to me with questions or topics that you would like us to cover. Thanks!

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