When it comes to making smart investments, it’s easy to get overwhelmed by the options available. Here, we break down cryptocurrency trading versus stock trading – and the pros and cons of each.
Today, a multitude of options exist in which one can invest his or her hard-earned money. These include everything from high-yield saving accounts, precious metals like gold and silver, stocks, bonds, money market funds, cryptocurrencies, and real estate.
The most popular investment option is definitely stocks. However, in recent years, cryptocurrency trading has gained major prominence, leading to the formation of several cryptocurrency exchanges where people who know how cryptocurrency works can purchase Bitcoin, Ripple, Ethereum, and more. Thus, many investors are adding cryptocurrency to their portfolios.
Cryptocurrency is an asset class which is becoming more mature, with origins reaching back to 2009 when the mysterious Satoshi Nakamoto generated the first Bitcoin. Bitcoin stems from the blockchain, a form of record-keeping technology, which is likened to a “digital ledger.”
Basically, when someone uses Bitcoin (or any cryptocurrency for that matter), to purchase a good or service, the buyer sends the amount of bitcoin due from his or her public wallet ID (where cryptocurrency is stored) to the sellers. Then, the transaction is generated on an electronic network, which subsequently creates a hash-code. This code is then deciphered on the network, with high-powered computers plugging in differing algorithms to determine the correct code. The computer which finds the code is awarded one Bitcoin from the network – a process commonly known as Bitcoin mining, which in turn verifies the transaction. After that, the user may keep the coin for him or herself, or, like a stock, sell it to keen buyers.
It is important to note that cryptocurrencies are independent of any central bank or authority. The buying and selling of cryptocurrency to earn money via arbitrage has become very popular, which has fueled modern-day cryptocurrency investment.
Although Bitcoin’s USD 119 billion market cap is a tiny fraction of the S&P 500’s, the trading of Bitcoin and other cryptocurrencies are gaining in popularity. There are both similarities and differences between cryptocurrencies and stocks.
Both cryptocurrency and stocks are sold on an exchange. However, a stock represents a tiny fraction of a company’s ownership, whereas when one owns a cryptocurrency, he or she owns that coin outright. Moreover, cryptocurrency can be traded directly between users; when stocks are traded, the transaction must go through a broker. Unlike stocks, which are, in part, valued by how much actual profit they make, cryptocurrency is valued mainly by speculation and does not have any physical backing besides the faith its holders put into it.
Additionally, governments heavily regulate the trading of stocks with bodies such as the Securities and Exchanges Commission. In contrast, as a nascent asset, cryptocurrencies are subject to fewer regulations, which is also partly due to the fact that they are independent of any central bank. In many states across America, there is a lack of cryptocurrency regulation, which poses potential threats and problems for cryptocurrency investors. This, however, is changing with cryptocurrency legislation already being considered in the US Congress.
The growing popularity of Bitcoin and other cryptocurrencies will undoubtedly have a great impact on investors. Fidelity Investments, an asset management firm, will soon launch a Bitcoin index fund, though it will only be available for institutional investors only. But, with the backing of a financial titan like Fidelity, Bitcoin will likely continue to grow in popularity.