Why Is Crypto Riskier Than Stocks?
by Maurie Backman | Published on Oct. 12, 2021
Here's why investors in digital currencies need to be extra cautious.
You'll often hear that there's no such thing as a risk-free investment, and there's a lot of truth to that. The reality is that even so-called safe investments like bonds can hurt investors. Bond issuers can default on their interest payments or fail to repay bondholders their principal investments. Granted, those are fairly rare occurrences, but they do happen from time to time.
Now stocks are generally considered to be a much riskier investment than bonds. Stock values can swing wildly from one day to the next, whereas bond values tend to hold steadier.
But even stocks aren't as risky as an investment that's grown increasingly popular this past year -- cryptocurrency. Here's what makes digital coins riskier than stocks.
1. Stocks have been around longer
Some companies that trade publicly today have been around for 100 years or longer. Crypto, by contrast, is a much newer concept. The first digital currency, Bitcoin, has only been around since 2009. So we don't know if cryptocurrency really has the same long-term staying power.
2. Stocks have a proven history of recovering from downturns
The stock market has seen its share of crashes through the years, and ultimately, it's managed to recover from every one. Many investors who held on to their stocks and rode out those crashes were able to emerge from those events unscathed.
Meanwhile, we've yet to see a major cryptocurrency crash. Sure, the crypto market has plunged at certain times, but it hasn't exactly been through a prolonged event like the Great Depression or the more recent Great Recession.
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Does that mean that cryptocurrency can't withstand an event like that? No. The point, however, is that we don't know what its recovery potential looks like.
3. It's easier to measure the value of stocks
There are several tools and formulas you can use to determine what a stock's value should be, and whether it's trading at a fair price. For example, you can see how much a stock is trading for relative to its earnings, which can give you a sense of whether it's a good time to buy that stock or whether its current price is too high. And if you have a good brokerage account, you'll get access to educational resources that can help you better analyze stocks, even if you're new to investing.
With cryptocurrency, it's much more difficult to figure out if the current price of a given coin is fair, or if it reflects the actual value of that coin. The reason? Crypto prices are largely based on news events and demand -- not company earnings, as is the case with stocks. And that alone makes digital currencies a riskier investment to dabble in.
Is crypto right for you?
Even though cryptocurrency is risky -- riskier than stocks, even -- that doesn't mean you need to stay away from it. What you do need to do, though, is invest with caution.
First, research cryptocurrency exchanges as well as different coins to make sure you're choosing the right fit for your portfolio. Next, figure out the right amount of money to put into crypto, keeping in mind that you may lose most, or all, of your investment if circumstances align that way.
Finally, make sure that cryptocurrency represents just part of your total investment portfolio. It's always a good idea to diversify your portfolio, which means you shouldn't only have your money in stocks, either. A healthy mix of stocks, bonds, and crypto could be your ticket to growing wealth without taking on too much risk.
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