In recent years, cryptocurrency investment as an alternative to stocks has become increasingly popular and high-profile. In fact, many people appear to consider crypto trading as just another version of stock trading but in fact, they are very different.
Whether you’re looking for the best crypto South Africa can offer or you are weighing up the two options, it is important to fully understand the differences and similarities so that you can make the right decision about which to include in your investment portfolio. In this article, we take a look at the key differences between the two forms of investing and ask which is best.
How do stocks work?
When you buy a stock in a company, you are essentially buying a piece of that company. Even if the company has released millions of shares, your share will technically give you a tiny piece of it. If you own enough stock, you may even have a say in how that company is run.
The price of a stock, which can rise or fall, is displayed at a stock exchange and that is the price at which you can buy or sell. But stockholders will also benefit from dividends: a bonus per share that is paid to all shareholders, often on an annual basis.
How does cryptocurrency work?
Cryptocurrency, or crypto for short, is a form of digital currency that is primarily designed to be used as a way to pay for goods and services. There are many types of cryptocurrencies but they all use a technology known as blockchain.
This is a database that is decentralized and thus not owned by any one individual or organization, that stores data in a particular way. It is this technology that ensures that crypto is secure.
Why is crypto so popular?
Crypto has become popular in the last few years because many people believe it will be the currency of the future, removing banks from their position as managers of the money supply, and running on technology that is both transparent and secure. However, to invest in crypto, you still need to use a traditional currency, such as dollars or rand, exchanging the value of one for the other.
Stocks vs crypto
You can see from the above information that stock investment and crypto investment are very different. Although it is possible to buy and sell shares in the short term, buying a stock is essentially investing in a real company and it is possible to retain those shares for many years, enjoying returns as the company grows.
When you buy crypto, you are essentially speculating that the crypto will rise in value. You are not owning a piece of a real company and there are no dividends associated with crypto. Additionally, crypto is not like a real physical asset, such as a painting, or a commodity such as gold. It is a purely speculative way to invest that is highly volatile.
Volatility is the main drawback of crypto investing. These currencies are extremely volatile and can rise and fall in price dramatically and without warning. Several cryptocurrencies have disappeared entirely and billions have been lost in sudden market crashes.
No real asset
As mentioned above, owning cryptocurrency does not give you ownership of any real assets and is not associated with a real-life entity. It cannot generate profits on its own and the only way of earning an income from crypto is to sell it to someone who is prepared to pay for it more than you did.
For many people, the fact that crypto is decentralized is one of its big selling points, but it also means that there is no body overseeing or regulating the crypto market, which leaves plenty of opportunity for illegal actors and no recourse for those who are the victims of fraud.
The only way that you can buy crypto at the moment is via a crypto trading exchange. These currencies cannot be bought from banks and in general cannot be used to make significant purchases or to make bank transfers, limiting crypto’s usefulness.
Is crypto a good choice?
There may be some truth in the idea that crypto – or at least, something similar to crypto – could be the currency of the future. And for those with an in-depth knowledge of crypto and its technology, with plenty of money to invest, it can be a good choice for investment.
For most investors, however, stocks will offer a less volatile, more reliable way to invest, since they offer a tangible asset, are well regulated and are tied to the performance of real companies.