In 2009, the world of finance and investing was irreversibly altered with the creation of the first decentralized payment system: Bitcoin, a digital currency with no formal ties to governments and no single entity having centralized control. It has subsequently led to more than 12,000 cryptocurrencies, with 1,000 more added to the market every month.  

Meanwhile, stocks and mutual funds have been around for ages and have been popular choices amongst investors and traders who want to bag returns by speculating prices. While cryptocurrencies, stocks, and mutual funds are great avenues for income generation via trading or investing, several differences make each distinct from the other. Let’s find out. 

Cryptos, Stocks and Mutual funds

Stocks are considered traditional assets possessed by an individual which yield short-term or long-term returns to the holders. They signify ownership of a piece, or a fraction of a company’s valuation represented in the form of a share of a company. Mutual funds are investment funds managed by professionals that consist of funds from investors with similar investment objectives to buy stocks, bonds, and other securities. It is generally chosen by people with limited knowledge and time to deal with the complexities of trading.  

Meanwhile, cryptos are unlike any traditional assets. They are digital assets secured by cryptography and living over a blockchain. Cryptos like Bitcoin, Ethereum, Cardano, Litecoin, Matic, etc., serve varied use cases and belong to different categories of assets. For instance, Bitcoin is a store of value, whereas the Ethereum platform is meant for decentralized applications. Ether, its native token, is used to pay gas fees on the platform. 

Crypto vs. Stocks/Mutual funds 

While stocks and mutual funds are viewed as more stable and safer, crypto is regarded as their riskier counterpart awarding better returns, given they are still a nascent asset. Crypto and stocks/mutual funds are all strong investment choices on the whole and are opted for by investors worldwide, but the former is extremely different from the conventional investment options and serves distinct purposes in an investment portfolio. Cryptos being uncorrelated assets, provide a hedge against inflation and are a great way to diversify investments and gather new revenue streams.  

While stocks let the investors earn via price appreciation and dividends, cryptos provide multiple sources of income besides price appreciation, including staking, yield farming, in-platform rewards, etc. Also, the cryptos come with their set of in-platform perks, which the holder can enjoy while transacting with that particular crypto platform. 

Ownership

To buy stocks, investors need to open an account at a brokerage that trades stocks on their behalf and requires a lengthy formal process that requires investors to provide personal information to their brokers, such as their address and contact details. 

In case of crypto, CEXs or centralized exchanges require users to get their KYC done before they are onboarded. Besides this, CEXs employ a variety of security checks to safeguard user assets. Crypto trading can also be completely anonymous in decentralized exchanges if the buyer chooses not to reveal their identity since they hold their assets in a virtual wallet. There are lesser chances for fraud as cryptos can only be transferred from one wallet address. Also, since the data is immutably stored over a blockchain, the entire transaction history can be tracked and traced.

Exchanges 

The trading of stocks takes place on accredited exchanges such as NSE and BSE, via broking platforms like Zerodha. These brokers act as middlemen between the investor or trader and the stock exchange. Whereas in crypto trading, traders and the crypto exchanges like WazirX are the only parties involved. The disintermediation accorded by crypto exchanges allows cost savings comparatively.

Also, crypto exchanges like WazirX have a major chunk of their user assets in cold storages and deploy multi-signature wallets along with regular security audits to ensure that platform users have a safe and hassle-free trading experience. In India, most of the crypto exchanges operate using self-regulatory mechanisms as regulations are still underway. However, there are numerous countries that grant licenses to exchanges. Given the fact that it is a much newer form of investing, crypto exchanges are still in their early stages and have a ton of room for improvement in terms of security and building credibility.

Regulation

Due to government regulations (which often differ country by country), companies that have sold stocks to the public are liable to disclose all the information which could affect their stock value. This information helps investors make well-informed decisions regarding their portfolios. 

On the contrary, crypto markets are largely unregulated, which leaves the traders to use their own wisdom while trading in the crypto market. Investors must research on their own by reading the news, joining online communities, and finding information about the founders of the blockchain platform. It is important to note here that, as a largely unregulated entity, crypto markets have lesser provisions for investors lest something should go wrong. While each country has taken it upon itself to enact laws and regulations to perimeter the growing markets, global regulatory bodies like FATF (Financial Action Task Force) have come up with a universal set of regulations for digital assets. 

Liquidity and Volatility 

Stocks are perceived to be largely liquid, while liquidity varies from one crypto to another. Also, both entities can deal with slippage when an investor sells a large amount of an asset during periods of low liquidity, negatively affecting the whole market for the asset.

Moreover, both markets have their risks, but crypto is said to be more volatile since the market is still relatively new. It is obvious, though, that high risk means the potential for higher gains. Crypto investors are known to make millions from their investments, with the famous Winklevoss brothers becoming billionaires due to their early interest and investment in Bitcoin.

The threat of incidents such as Black Monday is always lurking in investors’ minds, which is why greater importance is given to creating a robust, diversified portfolio. Crypto is often viewed as an effective hedge against a stock market crash since its price action is generally independent of other conventional assets. Thus, it has proven to be an important part of a diversified portfolio to offset the impact of a crash in the value of a different asset. 

It is impossible to go online or to a social gathering today and escape the conversation around the rise of crypto. It is a newer investment option with drastic differences from the traditional options of stocks and mutual funds, and many consider it the riskier choice. However, its rising popularity in recent years has allowed it to become something every investor considers having in their portfolio, with around 106 million people investing in crypto today. 

Planning to start your crypto journey? Now buy your first crypto with as low as Rs. 100 on WazirX!

Also Read: What are Altcoins? Here’s all you need to know


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