Cryptocurrencies (or “cryptos”) have surged in both popularity and value over the past decade.
Yet while major cryptocurrencies like Bitcoin and Ethereum continue to dominate headlines, a lot of people simply don’t know enough about cryptos to make an informed investment decision.
That’s why many investors tend to stick with traditional asset classes like stock.
Believe it or not, investing in stocks can be similar to investing in cryptocurrencies.
But the asset classes are also different in some pretty fundamental ways, and they each have their own sets of pros and cons.
This guide explains how cryptocurrencies work and the differences between cryptocurrency and stocks. It also discusses how you can invest in cryptocurrencies using a UGMA custodial account.
What is Cryptocurrency?
In case you’re new to the world of crypto investment, let’s take a step back and talk about what crypto is and how it works.
A cryptocurrency is a digital “currency” that’s based across an online network.
Unlike traditional currencies like the U.S. dollar or the Great British pound, a cryptocurrency is totally decentralized. That means there are no central banks or governments regulating currencies and their movements.
Cryptos also generally don’t have physical coins or dollar bills you can see and place in your hand. That’s why they’re considered a digital asset rather than a traditional currency.
Because cryptos are 100% digital, cryptocurrencies are protected by advanced encryption and cryptography techniques to keep your investments (and the networks they operate on) safe. That’s where the name “cryptocurrency” derives from.
Whenever a purchase is made in crypto, transactions are verified using a process known as “mining.” Afterward, the new balances are recorded on a public ledger that everyone in the world can access.
Each record is encrypted. But the fact that everybody can see transactions on the public ledger ensures a degree of transparency and accountability.
Over the course of the last decade, the number of cryptos available has absolutely skyrocketed — and with an increase in investor demand, cryptos have also posted remarkable jumps in value.
At present, the global market cap of the crypto sector is valued at $2.48 trillion.
But it’s important to note that not all cryptos are created equally. Some crypto investments have proven more sustainable in the long run, while others have come and gone fairly rapidly.
As of November 2021, there are more than 7,700 cryptocurrencies available to invest in. Here are the most popular cryptos on the market today:
- Bitcoin (BTC)
- Ethereum (ETH)
- Binance Coin (BNB)
- Tether (USDT)
- Solana (SOL)
Each crypto operates independently and relies on its own unique network of exchanges, digital wallet operators, and payment services to support your investments and transactions.
Bearing in mind how rapidly cryptocurrencies have grown as an asset class over the last decade, crypto is definitely worth considering as part of a long-term “buy and hold” investment strategy.
But we’ll explain that more in just a minute. First, let’s explore how crypto stacks up against more traditional asset classes.
Cryptocurrency vs Stocks: What’s the Difference?
Because of the stark rise in value that digital currencies have had in recent years, many investors have started to carefully weigh the pros and cons of buying stocks vs crypto.
Before investing for yourself (or for the kids in your life), it’s important that you understand the key difference between asset classes like traditional stocks and cryptocurrencies.
The number one difference when it comes to cryptocurrency vs stocks is ownership.
When you buy shares of stock traded on the stock market, those shares are securities that generally represent a portion of the equity in the company. Translation: when you own a share of stock, you own a piece of the company that stock belongs to.
But most stock classes also go hand-in-hand with certain shareholder entitlements.
For example, as a shareholder, you’ll often get to vote on big company decisions. You’re also generally entitled to a proportional share of the company’s profits in the form of annual dividends.
By contrast, crypto-assets vary quite a bit in terms of how ownership is represented and the rights that ownership entails.
Most cryptos are digital assets that take the form of utility tokens. Those tokens are then used within the public ledger (or “blockchain”) for you to buy and sell real things. But unlike stock, crypto ownership doesn’t give you a legal stake in the organization that issued the asset.
In addition, cryptos like Bitcoin (BTC) aren’t tied to business operations in the way that stock in a company is.
Instead, Bitcoin is designed as a store of value — making it more of a commodity you can hold onto, like gold..
One advantage you’ll gain when it comes to cryptocurrency vs stocks is market access.
When you’re investing in stock, trading is always limited to set business hours. Even if you’re using a sleek trading app late at night, trades can’t generally be processed until the opening bell the following day.
By contrast, crypto markets don’t ever close. They’re open all hours of the day — including holidays. This makes it easier for you to quickly enter or exit a market position by purchasing or selling crypto-assets at the drop of a hat.
Another key difference between cryptocurrency and stocks is how they’re issued.
When a publicly-traded company issues stock, those companies typically then have the option to issue new shares at certain points depending on stock market rules and internal company policies.
That effectively chops up equity in the company into smaller shares, but companies do it to help generate more funding for operational activities.
The supply of crypto-assets is decided by the issuing organization’s blockchain policies. When a crypto company wants to mine more assets, that decision isn’t limited by stock market rules or regulatory laws.
Likewise, some cryptos tend to set hard caps on their total supply — which means after they get to a certain point, they refuse to issue any more coins.
Liquidity can be an issue when you’re trading some cryptos or altcoins on a smaller crypto platform or crypto exchange. That means you might not be able to sell back your crypto-assets at short notice in exchange for traditional currency like U.S. dollars.
This isn’t an issue you’d expect to run into on the stock market. Using a standard brokerage account, it’s not usually a problem to sell stock shares and get cash payment for those shares almost instantly.
When a company is publicly traded, that business is obligated by law to maintain certain transparency levels. This transparency normally takes the form of annual reports, quarterly financial reports, shareholder meetings, and more.
Unfortunately, that’s not how cryptos work. Most governments and regulators are still trying to catch up with crypto technology and how it should be managed in law.
As a result, crypto projects aren't subject to the same level of legal scrutiny as publicly traded companies.
That means, when it comes to crypto, you might not have as much knowledge about the assets as a stock investor would have.
How to Invest in Cryptocurrency vs Stocks
If you’re ready to start investing in cryptocurrencies or stocks, you have a few different options available to you.
To help get you started, let’s dive into the most common ways to buy stocks vs crypto.
Is buying cryptocurrency different from stocks?
If you want to buy stock shares, the most common route is to use a brokerage account. This is a special asset vehicle you can set up through a stock brokerage that enables you to buy, sell, and hold stock and other securities.
Alternatively, you can invest in a financial vehicle with pre-built portfolios composed of securities like stock shares, mutual fund shares, and exchange-traded fund (ETF) shares.
Investing in crypto works a little bit differently.
If you want to buy Bitcoin or another crypto, your investment journey starts by choosing a trading service. The most popular services are normally a cryptocurrency exchange like Gemini, payment services, or a brokerage that allows you to buy and hold crypto.
After choosing an exchange or other payment service, you can set up a digital wallet. This allows you to buy crypto with traditional cash like U.S. dollars and store that digital currency safely until you want to sell it and turn it back into normal currency.
Unfortunately, for young people interested in investing, most exchanges and payment services require them to be at least 18 to set up an account.
This means if you want to purchase crypto for a child as an investment in their financial future, the best way to do so is to set up a UGMA custodial account through EarlyBird.
Adding cryptocurrency to your loved one’s investment portfolio
Are you looking to invest in a child’s financial future and leverage the big gains forecasted in the crypto space in the years to come?
EarlyBird offers adults the ability to add leading cryptos like Bitcoin (BTC) or Ethereum (ETH) to their existing portfolios made up of stock and ETFs by partnering with leading crypto exchange Gemini.
Why choose a portfolio mixed with both stocks and crypto?
When investing responsibly on behalf of a child, you shouldn’t put all your eggs in the crypto basket. You should be investing in crypto alongside more traditional assets like stocks.
In terms of how much of your portfolio should be crypto, financial advisers recommend anywhere from 1–10% of your total investments. But if you choose to invest in crypto through a UGMA account with EarlyBird, you’ll be in the driver’s seat.
You can select from one of several portfolios with different asset mixes designed to cater to your own risk appetite.
Because cryptocurrencies are often a high-risk, high-reward asset class, EarlyBird offers these options as part of our less conservative portfolio options.
Volatility generally shouldn’t be an issue when investing in crypto for a child. After all, because the beneficiaries of these accounts are children with longer time horizons, adding risk and volatility in exchange for higher returns isn't necessarily a bad thing for all investors.
Regardless of how much experience you may or may not have investing in cryptocurrency vs stocks, it’s fair to say that crypto is here to stay.
If you’re considering investing in crypto, it’s critical that you understand the risks involved and do your homework. But by investing with a dynamic partnership like the one between EarlyBird and Gemini, you’ll be able to invest with confidence and build a nest egg for the future.
Ready to start investing in crypto for a child you love? Download the EarlyBird app now.