Cryptocurrency vs. Stocks: Understanding the Risks

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All investments come with risk, but here's what you need to know before dabbling in crypto.

Any time you invest money, you run the risk of losing some or all of it. There's no getting around that.

The only place to put your money where it's guaranteed to be protected is the bank, where savings accounts and certificates of deposit are insured for up to $250,000 per depositor. When you buy stocks in a brokerage account, their value could decline over time.

Similarly, if you invest in cryptocurrency, you run the risk that the digital coins you buy will sink in value over time, to the point where they may even be worth nothing.

But is cryptocurrency a riskier bet than stocks? Let's dive in.

Stocks vs. crypto: Two specific risks

Both stocks and cryptocurrency carry risk. The difference, however, is that stocks have been around a lot longer than cryptocurrency, and it's easier to assess their value. So it's not as difficult to get a handle on what their risk entails.

Longevity-related risk

Say you buy shares of a stock for $100. Over time, they could grow to be worth $200, or they could become completely worthless. But much of the time, the latter won't happen. There are plenty of publicly traded companies that have been around for more than 100 years, and over time, they've proven to be relatively stable investments.

This doesn't mean that their stock prices don't fluctuate -- they do. But it does mean these companies have staying power.

Newer companies, on the other hand, are often riskier than well-established ones, because they don't have that same history behind them. This doesn't mean that you can't do well by investing in newer companies -- but be aware that a company that went public in 2019 may be a riskier investment than one that went public in 1919.

With that in mind, it's easy to make the argument that cryptocurrency is riskier than stocks for one big reason -- it hasn't been around as long. We've seen the stock market survive the Great Depression, the Great Recession, and, most recently, the big hit it took at the start of the coronavirus pandemic. Investors who didn't pull their money out of stocks during these volatile periods, but instead stayed the course, still positioned themselves to make money, because the stock market has ultimately recovered from every downturn it's faced.

Because cryptocurrency hasn't been around as long, we don't know how well it can fare in the face of a major, prolonged crash. Sure, cryptocurrency values fluctuate all the time, and we've seen highs and lows. But at the end of the day, the digital currency market doesn't have the same history as the stock market.

Now, this isn't to say that cryptocurrencies couldn't survive a major crash. The point, however, is that because cryptocurrency hasn't been around very long, it's harder to predict what might happen if that particular market were to sink.

Value-related risk

Another risk related to cryptocurrency has to do with its value. Stocks become more valuable over time when the companies behind them do well and earn more money. For cryptocurrency to really gain a lot of value in the long run, it needs to become a widely accepted form of payment. And right now, it's tough to predict whether that will happen.

Also, with stocks, there are tools you can use to determine their value. You can look at a company's financial statements (all publicly traded companies must disclose this information) to see how much debt it has and how well it manages its cash. You can also look at the products or services a company is developing to get a sense of whether it's likely to earn more money in time or not.

Cryptocurrency doesn't work the same way. There aren't specific financial ratios or numbers you can really look at to determine what a given coin should be worth. The best you can do is see how its price has evolved over time, but that only gives you limited insight.

It's also unclear what regulations might be put in place should cryptocurrency become a standard payment form. As such, there's a bit more risk with cryptocurrency right now because we don't know exactly where it's headed.

None of this is meant to say that you shouldn't buy cryptocurrency, or that you'll lose more money with crypto than you will in the stock market. The point, however, is to understand the risks involved before buying digital currencies. You may do quite well dabbling in crypto, but it's important to know what you're getting into before diving in.

Buy and sell crypto on an expert picked exchange

There are hundreds of platforms around the world that are waiting to give you access to thousands of cryptocurrencies. And to find the one that's right for you, you'll need to decide what features that matter most to you.

To help you get started, our independent experts have sifted through the options to bring you some of our best cryptocurrency exchanges for 2021. Check out the list here and get started on your crypto journey, today.