One of the best ways to build wealth over time is to invest your money. Choosing the right investments can be tricky, though, because all investments are subject to some degree of risk.
Cryptocurrency has been in the headlines lately as prices have plummeted over the past couple of weeks. The price of Bitcoin (CRYPTO: BTC) has fallen by around 32% over the past two weeks. Ethereum (CRYPTO: ETH) is down by around 35% during that same time period, and Dogecoin (CRYPTO: DOGE) has dropped by around 30%.
While crypto has proven that it can be incredibly volatile, the stock market has experienced its fair share of turbulence as well. Just last year, the S&P 500 lost more than one-third of its value during the early stages of the COVID-19 pandemic.
If both cryptocurrency and stocks can be volatile, which one is a better investment? Here's what you need to know.
How are stocks and crypto different?
Stocks and cryptocurrency are both types of investments, but there are several key differences between them.
For one, stocks have been around for centuries, while cryptocurrency has only existed for a little over a decade. Bitcoin was established in 2009, and we're still in the early stages of the crypto movement.
In addition, stocks are a different type of investment than crypto. When you buy a share of stock, you're investing in a particular company that you believe will continue to grow in the future. With cryptocurrencies, you may buy tokens of a particular currency to use them as a form of payment, or you might simply hold on to them in hopes that they increase in value.
Cryptocurrencies also don't trade on traditional stock exchanges. To invest in crypto, you'll need to use a crypto exchange and store your tokens in a digital wallet. In other words, you can't buy and sell crypto like you would a stock.
Comparing risk and reward
The advantage of investing in cryptocurrency over stocks is that there's greater potential for reward. Ethereum, for example, has seen its price increase by 1,200% over the past year — and that's despite the major downturn over the past couple of weeks. The S&P 500, on the other hand, is “only” up around 42% over the past year.
However, despite its explosive growth, cryptocurrency is generally far riskier than stocks.
Of course, not all stocks are created equal, and some are higher risk than others. But cryptocurrency is a relatively new phenomenon, and nobody knows what the future holds. While it could be the next big thing, it could just as easily flop. So although you could make a lot of money with crypto, you could also lose everything.
For that reason, it's wise to make sure you have a high tolerance for risk before you even consider investing in cryptocurrency. And if you do choose to invest, it's also smart to balance it out with a solid portfolio of relatively safe stocks.
Stocks can also be risky, but you can mitigate that risk by doing your research and choosing stocks that are likely to perform well over the long run. These stocks will still experience volatility at times, but they're more likely to recover eventually. If you choose to invest in crypto as well, a solid selection of stocks can prevent your crypto investments from sinking your entire portfolio if they take a turn for the worse.
Between stocks and cryptocurrency, stocks are generally the safer option. But that doesn't mean you can't invest in crypto. Just be sure you have a high tolerance for risk, a well-diversified portfolio, and are only investing money you can afford to lose. By doing your research and choosing your investments carefully, it will be easier to balance risk and reward.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.