Cryptocurrencies are a form of digital currency which is created and stored electronically. These currencies, also called crypto or digital cash, use cryptography to secure transactions and control the creation of new units. Bitcoin (XBT), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) are among the most well-known in the cryptocurrency markets today.
What’s the difference between cryptocurrency and digital security? A cryptocurrency is like a digital version of money, like U.S. Dollars, whereas digital security is like stock in a company that you can buy or sell just like a stock, such as Apple Inc. (AAPL).
Digital Securities Are Backed by Real Assets
Digital security is a representation of an actual, tradable asset. For example, digital security could represent shares in a corporation like McDonald’s. Digital security can be traded online and independently from the actual assets that it represents.
Digital securities are held in accounts at reputable financial institutions. If you invest in digital security representing two shares of Microsoft stock and your account balance is $1,000, then you have $1,000 worth of Microsoft stock.
Cryptocurrencies Like Bitcoin Are Not Tangible Assets
Cryptocurrencies like bitcoin are not backed by anything tangible. It is not backed by gold or silver, and certainly no government regulation or oversight. Although their initial value proposition was the potential for anonymity and security, the level of volatility in their prices has made them more of an asset class than a currency.
Cryptocurrency value is now largely based on speculation. If you buy some bitcoin, then wait a while to see what happens to its price, you’re speculating. This can make it hard to tell if you’re buying into something whose value will rise over time because something fundamental has changed or because people are betting that someone else will be willing to buy it off of you at a higher price later.
If you’ve invested in cryptocurrencies for less than five years, intending to hold onto gains for at least a couple of months before selling, you may be subject to capital gains taxes.
Digital Securities Offer Much More Opportunity for Profit
Digital securities, such as stocks, bonds, and private equity investments, are a great way to build wealth. If your investment is protected from market volatility by rules like put options or other risk management tools, then you will have an opportunity to profit even more!
Cryptocurrencies Are Highly Volatile and Are Not Under Regulation
Digital securities are similar to cryptocurrency but can be purchased through a broker and have a stable value. Cryptocurrencies do not have a stable value, and cryptocurrency prices are determined by market forces. This means that it can fluctuate wildly in comparison to its digital security counterparts.
Cryptocurrency is not under the regulation of government entities, while digital securities must get approval before being listed on an exchange. Digital securities also have the backing of actual banks and companies to maintain their stability and safety for investors.
Digital securities are typically safer investments than cryptocurrencies because they have more regulations behind them. While there is still a risk involved with investing in either one, digital securities will give you fewer headaches about your potential losses and will provide you with better opportunities for growth over time.
Digital Securities Are Safer Than Cryptocurrencies
If you’re not old enough to remember back before the financial crisis, let me summarize, it was a time when consumers were worried about the safety of their money.
Consumers lost or gained millions of dollars in assets overnight. Trading stocks and other securities on unregulated exchanges can be risky and even fraudulent. The government stepped in to protect investors by regulating how assets are bought and sold, which created a system that depends on a functioning market economy.
Markets all over the world need stability because, without it, there is no chance for individuals to earn income and make investments of their own accord. This means that regulation is necessary to keep an economy running smoothly.
Fortunately, this same government also protects consumers by preventing fraudsters from taking advantage of people’s lack of knowledge about digital securities and other emerging technology products like blockchain.
Any individual who wishes to invest in or trade digital securities needs only go online and follow a few simple steps. All transactions are overseen by “authorized participants” or just “APs”, who have been vetted by regulatory agencies like FINRA or SEC.
They ensure that every transaction meets certain requirements so that participants’ interests are protected. And if everything goes well, authorized participants bring together buyers and sellers who are interested in making transactions with each other.
Not every transaction goes through successfully, and that’s where things get interesting. Authorized participants then become involved in negotiating with each party until they find a suitable resolution.
The Bottom Line
The bottom line is that while cryptocurrencies might be very interesting to you, they’re also a highly risky and speculative investment. Even if you decide to play around with altcoins like Litecoin or Bitcoin, there are still risks involved. The same goes for most other cryptocurrencies.
What’s more, the actual process of buying and selling cryptocurrencies at present is rife with scams and difficulties, so it’s important to do your research before attempting any transactions.
Cryptocurrencies have always been a much riskier proposition than digital securities. A good rule of thumb for keeping up with developments in the financial world is this. If it sounds too good to be true, then it probably is.