With the exception of specialised stablecoins, cryptocurrency is not backed by any tangible assets. This is true even for the most well-known digital currencies, such Bitcoin and Ethereum.
You might be able to use a cryptocurrency to carry out certain operations, including sending money to someone else or utilising smart contracts that run automatically when specific conditions are met.
Why Does Cryptocurrency Rise and Fall?
Since cryptocurrencies are not backed by assets or cash flow, speculation fueled by sentiment is the only thing that can change the price of a bitcoin. Prices can change substantially when public perception changes. Therefore, the only incentive for buying bitcoin is the possibility that its value would increase in the future; this idea is known as the “greater fool theory of investment.”
You must be able to sell a cryptocurrency for more money than you paid for it in order to earn a return on your investment. In other words, the market must be more positive about it than you are.
A stock represents a tiny portion of a company’s ownership. It’s simple to lose track of this if you’re distracted by the shifting stock prices and the potential for profit. As a legal ownership position in the company, the stock gives stockholders a claim on the company’s assets and cash flow. These are the resources that support your investment and provide the basis of its appraisal.
Why Do Stocks Rise and Fall?
A stock’s price changes as investors assess the company’s prospects for the future. While short-term investors may get overly enthusiastic about the stock, the company’s ability to increase earnings over time ultimately determines the stock price. In other words, a stock grows through time as a result of the performance of the underlying business.
You should examine your risk tolerance before investing in a market-based asset like stocks or bitcoin. Can you handle these assets’ extreme volatility? How quickly do you react to wins and losses in investing?
Things to Consider Before Buying Stocks
- As an ownership stake in a firm, stocks’ long-term performance is influenced by the performance of the underlying business.
- If stockholders don’t like a stock, they can sell it and lower the price, but the stock must eventually cease to exist in order for it to lose value.
- The volatility of the stock market is tremendous, with many equities jumping by 100% or more in a year and dropping just as quickly.
- In general, investing through the stock market is a tried-and-true strategy with a solid track record.
- Mutual funds based on the Standard & Poor’s 500 are an option for investors who don’t wish to purchase specific companies and have historically returned 10% annually on average.
Things to Consider Before Buying Cryptocurrency
- Since bitcoin is not backed by any assets or cash flow, its price is completely determined by public goodwill.
- If traders decide they don’t want to hold bitcoin, its value could fall to zero because it isn’t backed by anything.
- The market is incredibly volatile, with cryptos frequently rising or falling by 50% or more in a year.
- As China did in 2021, nations might explicitly forbid the usage of cryptocurrency.
- Due to their youth, cryptocurrencies have not yet shown themselves as an asset class.
Similarities Between Trading Stocks and Investing in Cryptocurrency
Most investors today just log on to a digital exchange, brokerage account, mobile application, or other online platform to interface with the financial markets.
Most stock and cryptocurrency platforms are similar in terms of architecture, order-book-based liquidity mechanisms, and trading options. It has never been simpler to buy and sell equities, and cryptocurrency exchanges have made investing in digital assets as simple as doing so on traditional marketplaces.
On the majority of retail trading systems, the same standard trading order types—market, limit, and stop (or stop-loss)—are accessible. Here’s everything you need to know to review:
- A market order is one that instructs the purchase or sale of a security as soon as is practical at (or close to) the current bid (for a sale order) or ask (for a buy order) price. The fulfilment of an order under a market order is guaranteed, but the price cannot be guaranteed.
- You can use a limit order to purchase or sell a certain item at a specific price, or even better if that’s possible. A sell limit order must execute at or above the limit price in order to be fulfilled, while a purchase limit order may execute at or below the maximum price.
- A stop (or stop-loss) order is used to limit excessive losses. When the price of a security hits a specific level, known as the stop price, an order to buy or sell a stock is placed. When the stop price is reached, a stop order changes to a market order.
What Should You Invest In? Stocks or Cryptocurrency?
Do you want to invest in stocks or cryptocurrencies? The best course of action may be to invest in both if you have the extra money. Many financial professionals advise allocating the bulk of your portfolio to less volatile, more reliable investments like mutual funds and exchange-traded funds, including S&P 500 index funds.
A small amount of your portfolio may be set aside for speculative investments, which are made in high-risk, high-reward assets like cryptocurrencies. How much of your assets are speculative is ultimately up to you, although experts advise keeping it to no more than 5%.
Only invest funds in these assets that you won’t need right now. If the value of cryptocurrencies soars, the 5% of your portfolio that you invested in them will benefit from excellent returns, potentially doubling the value of your entire portfolio.
Then, you might sell some of your riskier investments and use the proceeds to buy more secure investments, never investing more than 5% of your portfolio in risky ones.
The value of cryptocurrencies has increased, but before investing merely because other traders have, investors should be aware of what they’re getting into. Consider how investing in cryptocurrencies will fit into your risk tolerance and financial needs before making the decision. Due of their ability to make significant profits without it, several investors, including financial legends like Warren Buffett, will not invest in bitcoin.