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Academy > Crypto Insights > Crypto vs Stocks: What Are They and How Do They Differ? >

Crypto vs Stocks: What Are They and How Do They Differ?

2021-12-17 10:57:22

Stocks have been the most popular financial asset class for many investors. For many years, the bulk of investment portfolios was made up of mostly stocks. Over the last 10 years, a new substantial asset class, cryptocurrency, has emerged as an alternative or complement to stocks.

Cryptocurrency is now shaping up as a viable investment product, but it has significant differences from stocks. The range of reasons for investing in cryptocurrency also spans well beyond mere profit-seeking.

crypto-vs-stocks

Crypto vs Stocks

What Is Stock?

Stock is a financial product that entitles you to part-ownership in the company selling it. Stock ownership gives you the right to receive dividends payable based on the company’s market performance. By buying stock in a company, you may also participate in shareholder meetings and decision-making on the future direction of the company.

By buying a company’s stock, you share the risks and rewards dependent on its performance. The risks are reflected in the stock’s per-unit price. A company that underperforms is likely to see its stock price decline. In this scenario, as a shareholder, you suffer a capital loss due to the price decline, i.e., the price of your asset is now lower than the price at which you bought it.

The rewards from the company’s success are reflected both in the potential capital gain due to the increase in the stock price and in the dividends paid to you. The more successful companies tend to pay more dividends and do it more frequently.

Stocks are the most popular asset class across the majority of investor types, particularly for individual investors. Stocks are also frequently referred to as equities or shares.

Along with bonds, stocks are one of the two main types of securities. Securities, in general, refer to financial products used by governments or businesses to raise capital from the market. The difference between stocks and bonds is that the former entitles you to part-ownership in the institution selling the stock, with the risks and rewards born by you, while the latter represents capital lent by you to the bond provider in exchange for fixed regular income.

Stocks are typically traded on authorized stock exchanges. There are currently around 60 of these exchanges around the world, with the two dominant ones being the New York Stock Exchange (NYSE) and the NASDAQ.

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What Is Cryptocurrency?

Cryptocurrency, in the context of investment finance, is a new large asset class represented by digital tokens native to blockchain platforms such as Bitcoin (BTC), Ethereum (ETH), and many others.

The cryptocurrency concept was born in 2009 with the introduction of Bitcoin, and at first referred only to a securely-stored, decentralized, digital payment and value storage system. After the launch of Ethereum, with its smart contract functionality, cryptocurrency moved well beyond the domain of digital payment and storage. The thriving variety of decentralized apps (DApps) on Ethereum added new functions to cryptocurrency, such as:

  • Transactional utility, i.e., enabling a variety of transactions on a blockchain platform using utility tokens
  • Decentralized governance of blokchains and DApps using governance tokens
  • A user reward mechanism using reward tokens

The main characteristics of cryptocurrency are:

  • Secure cryptographic storage
  • Decentralized storage and operations, independent from a central governing authority
  • Immutability of records

Cryptocurrencies are typically traded on centralized and decentralized crypto exchanges, as well as on peer-to-peer crypto marketplaces.

The decentralized, independent, and largely unregulated nature of cryptocurrencies has driven many governments to try to explicitly regulate them. This has been possible to some degree, e.g. many crypto exchanges do not accept users from the US, a direct result of the pressure applied by the US on the crypto industry.

The Chinese government has also been actively targeting cryptocurrency platforms, such as large mining pools, in a series of crackdowns.

Despite this unrelenting, and quite unfriendly, pressure by governments on crypto platforms, cryptocurrency has progressed confidently, as evidenced by its strong growth rates in recent years, and by now represents a popular financial product, albeit much less popular than stocks.

In most countries, including the US, cryptocurrencies are not considered a security. The US government has explicitly stated that it considers cryptocurrencies to be “digital commodities.”

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What Are the Differences Between Stocks and Cryptocurrency?

The key differences between stocks and cryptocurrency include:

  1. Ownership rights
  2. Regulation
  3. Overall risk and reward profile
  4. Liquidity
  5. Investment motivators

1. Ownership Rights

The main difference that sets apart stocks and cryptocurrency relates to ownership rights. Buying stocks makes you a part-owner of a company. However, the purchase of cryptocurrency does not normally entitle you to ownership rights, at least not in the sense of the traditional finance definition of ownership.

For example, even if you were to own the entire supply of Bitcoin, that would not make you the owner of the platform. The decentralized nature of blockchains ensures that coin ownership does not lead to such scenarios. The overall Bitcoin community, with the core development team, miners, advisors, and other key stakeholders, would quickly move to ensure that you are not able to cause any damage or usurp power.

In fact, you might actually get a pat on the shoulder for being the platform’s biggest supporter, but that 100% coin ownership would mean very little in terms of your ability to make sole decisions. You will also not be able to simply “sell” the Bitcoin network to anyone just because you are the person who owns all the coins on it.

In contrast, if you were to buy all the shares of a company, or in most cases, simply 51% of the stock, you could make all the decisions by yourself or sell the business to someone willing to purchase your stock.

2. Regulation

Another key difference between stocks and cryptocurrency is regulation. Stock trading is a highly regulated activity, with a defined set of laws governing it. In the US, the primary government regulator of stock trading is the Securities and Exchange Commission (SEC).

In addition to the SEC, a non-government organization, the Financial Industry Regulatory Authority (FINRA), also oversees the activity of US stock trading brokerages and other entities involved in stock exchanges.

Other countries with stock exchanges also have at least one government body regulating stock exchanges.

In comparison, cryptocurrency is minimally regulated in some countries and completely unregulated in many others.

3. Risk and Reward Profile

In general, stock trading is characterized by lower volatility compared to the cryptocurrency market. Crypto’s higher levels of volatility result in considerably higher risks, and also higher potential rewards, compared to stocks.

For example, over the last one year to November 20, the S&P500, the stock market’s primary index, has delivered a return on investment (ROI) of 32%, while Bitcoin’s ROI has been 221%.

In addition to price volatility, higher risks in cryptocurrency trading are also linked to less regulation and, therefore, a higher likelihood of scams.

4. Liquidity

Stocks, on average, are characterized by higher liquidity than cryptocurrencies. Most stocks may be easily traded on exchanges and quickly converted to hard cold cash. Exceptions are high-risk stocks in unpopular markets. These are often referred to as illiquid stocks. However, these stocks represent only a minority of the entire stock market.

On the other hand, many cryptocurrencies have much more limited liquidity. This is especially the case with low-cap newer coins. While leading cryptocurrencies, such as those ranked in the top 10, are highly liquid due to many exchanges actively trading in them, smaller cryptocurrencies may not be as easily and quickly cashed out.

top 10 cryptocurrencies by market cap in Dec 2021
The top 10 cryptocurrencies by market cap as of December 12, 2021 (Source: CoinMarketCap.com)

With the smaller-cap coins, you may have to wait a while for another trader willing to buy or sell your crypto. Additionally, most of these coins can only be swapped for other cryptos, but not directly for fiat money.

5. Investment Motivators

Stocks are overwhelmingly invested in for the purpose of profit-making. Some individuals also invest in a company’s stock because of the social causes supported or championed by these companies. However, profit-making remains the key motivator in the majority of cases.

In contrast, investments in cryptocurrency, while also driven in most cases by profit-seeking, are made for a wider variety of reasons. Some of the popular non-monetary motivators for cryptocurrency trading include:

  • Independence from a central controlling authority.
  • Confidentiality of transacting and value storage. While cryptocurrency trading is not completely anonymous, it is, in general, a more discreet way of transacting compared to stock trading.
  • An interest in and desire to learn the technology behind a crypto platform, be it a blockchain network or DApp.
  • Desire to participate in governing and managing a crypto project via owning its governance tokens.
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Conclusion

Stocks are the most popular product in financial markets and have been traded for many years. Cryptocurrency is a new asset class that is gaining popularity among traders. Unlike stocks, cryptocurrencies are not considered a security. Instead, most governments refer to them as commodities.

Stocks and cryptocurrencies have a number of important differences. These include ownership rights, regulation level, risk and reward profile, liquidity, and investment motivators.


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