When investing, one should diversify into different asset classes in order to diversify risks and returns. Traditionally, one would invest in the capital markets. But with the advancement in technology, it is now possible to invest in digital assets. A capital market is a market where sellers and buyers, like individuals and institutions, engage in trade of financial instruments such as stocks and bonds. A stock market is a market where stocks are bought and sold. In Pakistan, stocks are traded as a way to invest in Pakistan Stock Exchange (PSX).
Apart from the conventional form of asset class, cryptocurrency is a digital form of asset class. It is classified as a new medium of exchange, which relies on block chain technology. Cryptocurrencies are digital currencies, which are backed by decentralized systems that allow for secure online payments. Both the asset classes differ in how they are bought and sold along with having a different investment strategy.
WHAT ARE STOCKS?
A stock, also known as equity, represents the ownership of a fraction of a corporation. This entitles the owner of that stock to proportion of the corporation’s assets and profits depending on how much they own. Unit of stocks are called shares. The stocks are exchanged in the stock market. In the case of Pakistan, it’s the Pakistan Stock Exchange. Any fluctuation in the stock price is reflective of the investors view about the company’s performance in the future. Investing in stocks continues to be one of the most effective ways to invest money in Pakistan.
WHAT IS CRYPTO?
Cryptocurrency is a digital currency that is encrypted and decentralized. There is no central authority involved in managing and maintaining its value. Although it can be used to buy regular goods and services, most people view it as another asset class. The different types of cryptocurrencies are Bitcoin, Ethereum, and Dogecoin etc. Cryptocurrency can be purchased on peer-to-peer networks and cryptocurrency exchanges, such as Coinbase, Bitfinex etc.
DIFFERENCES BETWEEN STOCKS AND CRYPTO
Despite being an investment class, stocks and cryptocurrency have significant differences.
SStocks are relatively less volatile than cryptocurrency. As compared to stocks, crypto is a relatively high return investment. These changes could be economic, fundamental or technical. For example, during March 2020 the KSE-100 Index fell by 2416 points closing at 33,644 and as Covid-19 cases began to decline in Dec ‘2020, the stock market recovered at 43,791 points. Stocks may provide lower returns since they are relatively less volatile.
On the other hand, Cryptocurrencies are incredibly volatile investments. The extreme volatility in cryptocurrency means that it is a very risky investment. Ethereum, for example, started 2021 at about $730 and rose to $4,080 at the end of May. It dropped to about $1,786 in July, before rising to $4,082 in late October.
Stocks are substantiated by legitimate companies and these transactions have to conform to government regulations that are meant to protect investors from fraudulent practices. On the contrary, cryptocurrency is encrypted and decentralized. There is no central authority to maintain its value and is traded via the internet. Another distinguishing factor is that anyone can form a cryptocurrency. Cryptocurrencies are usually mined by different programmers and are largely unregulated. Since crypto is not monitored by a regulatory body, it has higher chances of fraudulence. Crypto is digital and therefore the possibility of an investor’s online portfolio getting hacked is probable.
Stocks are traded on accredited exchanges throughout the world, like the NYSE or the PSX. They offer stock buyers security, stability, and transparency and are built to handle large trading volumes every day. Exchanges are strictly regulated (although specifics vary by country), providing protection to buyers and sellers. Hence, it is a convenient way to make a money investment in Pakistan.
Exchanges for buying and selling cryptocurrency are newer. Dozens of crypto exchanges exist. Two of the largest are Binance and Coinbase. Some exchanges work with third parties to smoothly exchange conventional currencies, such as the U.S. dollar, for crypto. Registering for crypto trading is also fairly simple as it only requires downloading a cryptocurrency exchange app. After that, the selected app asks for relevant information to verify the investor’s profile. The crypto market operates 24\7 365 days a year. There is a wide variety of coins that investors can choose from according to the purchasing power they possess.
Ownership is also a key factor that differentiates the two. To trade stocks, the buyer usually opens an account with a stock broker. The brokerage makes the trades and holds the stocks in the buyer’s name. For example, some brokerage firms such as KTrade Securities Limited have allowed for investors to deposit funds as little as Rs.5000 to open an account with them. Hence, it is great for individuals that want to start off with a low investment business in Pakistan.
On the other hand, the buyer of a cryptocurrency is anonymous, where they hold the assets in a virtual wallet or a USB drive.
The process of buying stocks does not have the possibility to be hacked as all purchased stocks are tracked and record kept. Withdrawing money from a brokerage account is a fairly simple process. It may have a trivial or no withdrawal fee. KTrade Securities for instance has no withdrawal fee. The process of investing in stocks is transparent and the investor is notified of their transactions.
Another pro includes investors possessing knowledge of the firm’s performance based on which they can alter their investment decisions. There are multiple investments an investor can choose from. It is recommended to invest in companies about which the investor has some sort of knowledge or interest.
SHOULD YOU INVEST IN STOCKS OR CRYPTO?
Aside from the myriad of advantages and disadvantages to investing in these assets, there are other factors that need to be taken into consideration. Many professionals recommend investing in both since diversifying an investor’s portfolio is always the ideal to reduce risk. However, it is also recommended to invest according to an investor’s willingness to take risk. Crypto is more volatile and hence is riskier whereas stocks are relatively less volatile. There are also other assets that investors can invest in such as mutual funds or bonds depending on whether they want to make a big or small investment in Pakistan.
Cryptocurrency and stocks are both potential laden investments depending on the investor’s needs and willingness to take risk. It is essential for an investor to properly educate themselves before deciding on where to invest so as to reap the best results.