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A person invests in the stock market and cryptocurrencies to get higher returns than fixed deposits and other debt instruments. But with the higher returns, there is more risk involved and the associated volatility. We will compare cryptocurrency vs. stocks in detail so a person can have a true picture before investing.
A stock is a financial instrument representing ownership in a company and a shareholder owns a proportion of the company equal to the number of shares held. The company needs to hire employees, buy raw materials and grow at a fast pace. For financing the activities the company can raise capital by selling the shares. Equity financing is a route proffered by the companies to raise capital and the shares are listed on the stock exchange.
A cryptocurrency is a digital currency that is used as a medium of exchange and is not dependent on any central bank or government to sustain it. It is based on a network distributed across many computers. The decentralized nature allows them to exist outside the government’s control. Cryptocurrencies help in cheaper and faster transfer of money.
Over a longer time horizon, cryptocurrency and stocks give inflation-beating returns. The skyrocketing price of many cryptocurrencies over the last few years has taken the world by storm. The stocks which has been a preferred mode of investment for high returns is being challenged by cryptocurrencies in a person’s portfolio. It is always better to compare the risk and reward of any financial instrument before investing and without doing a proper study investing could be just like gambling. The comparison of both the investments is given below-
Trading history-
Stocks have a long trading history. The Dutch East India Company, founded in 1602 was the first joint-stock company and trade in the company’s stock occurred on the Amsterdam exchange. The Philadelphia stock exchange founded in 1790 was America’s first stock exchange. The history of the share market in India dates back to 1875.
Bitcoin is the world’s first digital currency, invented in 2008 by Satoshi Nakamoto and the use of the currency began in 2009 when its implementation was released as open-source software. So its use is very recent, and the records are only a little over a decade old whereas if one wants to study the stock markets one can find records of the last few decades or even the last few centuries.
Pricing Factors-
Stock is a fractional ownership in a business and gives the shareholders a claim on assets and cash flows. In the long term, the stock price moves depending on the company’s ability to grow profits and the sector outlook while in the short term the stock price moves on many factors like media news, inflation, brokerage reports, quarterly performance, acquisition merger news, politics and interview and tweets of the CEO.
The cryptocurrency allows a person to perform certain functions like sending money to other persons but it is not backed by hard assets. Since it is not backed by cash flow the price movement is driven by sentiment. For the cryptocurrency investment to be successful you must be able to sell it to another person at a greater price than you paid for it. It is driven by the hope that someone will buy from you at a greater price in the future than you paid to purchase it.
Volatility-
Volatility in the stock market is caused by uncertainty which can be due to changes in interest rates, tax rate changes, and inflation numbers, and could also be due to national and global political events. In a volatile market, there is a big up and down movement in the prices. There could be volatility in the individual stocks too. Stock markets are highly volatile. The Indian stocks can move up and down 5%, 10%, and 20% depending on which stock you are investing in. Beyond these price bands, the share price can’t rise or fall
Cryptocurrency is extremely volatile, much more than the stock price movement. Bitcoin and other altcoins have very large up and down movements and investing in cryptocurrency are like a roller coaster ride. The crypto can move in value many times in a few days and lose all the gains in a single day.
Regulatory authority-
The Indian stock markets are regulated by the Securities and Exchange Board of India (SEBI) and which closely monitors the markets and the shares that are traded. The purpose of regulation is to prevent and investigate fraud, keep the markets transparent and ensure that the investors are treated fairly. The two exchanges where most of the trading is done in India are the NSE and BSE.
Cryptocurrencies are not regulated and many independent companies run their own exchanges. In the stock exchanges, the shares are traded through a third party called the clearing house. A clearing house is a trusted middleman that allows two parties that don’t trust each other to do business. The clearinghouse provides insurance in case one party defaults during the trade. The cryptocurrency is traded directly between the buyer and the seller. In cryptocurrency, the intermediary is replaced by a blockchain or a smart contract. The intermediary brings the buyer and the seller together. The absence of intermediary means that cryptocurrency investors need to find each other on an ad hoc basis.
Taxation –
The shares that are listed on a recognized stock exchange and held for less than 12 months are treated as short-term capital. A rate of 15% is charged as income tax on short-term capital gains on the shares that fall under this category.
A long-term capital gain in shares is the profit generated from the sale of stock held for more than a year. The LTCG is taxed at a rate of 10% for gains exceeding the amount of Rs. 1 lakh. If you are not able to set off your entire capital loss in a year both long-term and short-term capital losses can be carried forward for 8 assessment years.
In the budget of 2022, it has been declared that the transfer of digital assets like crypto would be taxed at 30%. TDS at 1% will be levied above the threshold. Loss on the sale of digital assets can’t be set off against any other income.
Timings –
The primary share market timing in Indian stock exchanges is from 9.15 am to 3.30 pm excluding the pre-opening and the post-closing sessions. There is no trading on weekends and public holidays.
A person can trade in cryptocurrency 24×7 hours making it easier and more accessible.
Regulatory risks-
El Salvador is the first country to accept digital currency as a legal tender while China has banned cryptocurrencies and in most countries, the status of the regulation part is not clear.
Dividends-
The companies in the stock markets that earn profits may decide to distribute it to the eligible shareholders as a reward for putting money into the venture. The dividend payout is in cash and is decided by the company’s board of directors.
Some cryptocurrencies pay a reward called a cryptocurrency dividend; sometimes for passively holding the digital currency in a wallet and other times for taking a specific action. But these are not similar to the stock dividends that are paid from the excess cash that the company produces. Payout is dependent on trading volume on the cryptocurrency exchange.
Asset allocation-
A general asset allocation thumb rule is that an individual should hold a percentage of stocks, 100 minus their age.
For a 30-year-old person, 70% of the portfolio should be in stocks and for a 60 years old person 40% of the portfolio should be in stocks.
The crypto investments should be below 5% of your portfolio and due to the volatile swings, anything above that would affect the rest of the traditional portfolio and can even cause stress for an individual.
Individuals need to understand what they are investing in and need to match it to their risk tolerance and financial needs. Due to the increasing life expectancy stocks should definitely be there in your portfolio to make the money last your lifetime as financial instruments like fixed deposits give very low returns. A person investing in cryptocurrency should invest after thorough research as there is still no clarity on the regulation part and most of the countries are working out the regulatory aspects.