When it comes to ‘trading,’ stocks and shares are most certainly the first asset class that comes to mind. However, as we all know, the world of cryptocurrencies has now graced capitalism, further meaning that there's an infinite array of new possibilities for profit and utility-seeking traders to reap rewards on their investments.
In an effort to distinguish the two forms of investments from one another, this article will walk you through the key differences of crypto vs. stocks.
Crypto vs Stocks: Some Definitions
Stocks, also known as equities or shares, essentially represent ownership in a company. When you own a stock, you essentially own a portion of that company and have a claim on its assets and earnings.
As a stockholder, you're entitled to a share of the company's earnings- whether that be paid out in the form of dividends (a portion of profits distributed to shareholders), or retained within the company to fund growth.
In some cases, owning stocks can also grant you the right to vote on certain company decisions, such as board member elections or major corporate actions.
As with every investment venture, purchasing stocks comes with some risks. If the respective company you’re investing in performs well, the value of your stock may increase - therefore providing a return on your investment. However, on the contrary, if the company performs poorly, the value of your stock may decrease - potentially resulting in a loss.
When it comes to the determining factors of a respective stock’s price, they are largely influenced by factors such as company performance, economic conditions, industry trends, and investor sentiment. These with factors dynamically changing over time, it’s inevitable that stock prices follow suit by fluctuating.
Stocks are bought and sold on exchanges, which are platforms where buyers and sellers come together to trade. The most notorious exchanges include the likes of the New York Stock Exchange (NYSE) and the Nasdaq. To buy stocks, you typically need a brokerage account which acts as an intermediate facilitator for buying and selling of stocks on your behalf. Such entities used to operate via physical offices, however with the relentless dawn of the internet, many now operate online.
In a strategy known as ‘buy and hold,’ some investors aim to hold onto stocks for an extended period (often years or even decades). Alternatively, others engage in more frequent trading, wherein they try to take advantage of short-term price fluctuations.
To reduce/manage risks - and potentially enhance returns- investors diversify their investments by spreading them across different stocks and asset classes. As intuition would suggest, this works through the fact that different industries are impacted by different market forces (be it positive or negative forces).
On the contrary, cryptocurrency investments involve acquiring cryptographically-secure digital or virtual currencies. Unlike traditional currencies, cryptocurrencies operate on decentralised networks that are based on a revolutionary area of innovation called blockchain technology.
Cryptocurrencies exist purely in digital form and have no physical counterpart like coins or banknotes. Further, they are therefore stored in digital wallets, which are secure software applications that allow users to send, receive, and store their crypto holdings.
Through operating on decentralised networks, cryptocurrencies are not controlled by any single government, central bank, or institution (i.e. the main features that form the premise of decentralised finance (DeFi)). Instead, transactions are recorded on a public ledger called a blockchain, which is maintained by a network of computers (a.k.a.nodes) that are situated around the world. In turn, such technology ensures transparency, security, and immutability in all transactions.
There are thousands of different cryptocurrencies available, each with unique features, use cases, and underlying technologies. For example, the world’s first ever cryptocurrency Bitcoin (BTC) - which was created by pseudonymous figure Satoshi Nakamoto - serves as both a highly-utilisable payments and monetary tool, whilst other coins (known as altcoins) such as Ethereum (ETH) provide the DeFi infrastructures for an array of decentralised multimedia and operational ecosystems. There’s also niches such as ‘memecoins’ which are crypto projects based on pop-culture memes, as well as GameFi tokens which serve as in-game currencies for Web3 gaming titles.
There are various reasons as to why people invest in cryptocurrencies. Some view them as a store of value similar to gold, whilst others see them as a means of conducting secure and fast cross-border transactions. Additionally, some investors are drawn to the potential for high returns, as the crypto market has historically been known for its volatility.
With this in mind, the cryptocurrency market is famous for its high volatility. Prices can experience rapid and significant fluctuations over short periods, meaning both substantial gains and losses can be felt by those who dabble in it. In turn, this forms the consensus that crypto markets pose a higher level of risk compared to more traditional investments like stocks or bonds.
The regulatory environment for cryptocurrencies varies by country and is evolving. Some governments have embraced them, while others have implemented strict regulations or even banned their use. Through this, it’s important for individual investors to be aware of the legal status of cryptocurrencies in their respective jurisdictions.
Additionally - and as with any other asset - security is paramount when it comes to holding crypto. This is why investors take several measures to safeguard their cryptocurrency holdings, such as using secure wallets, enabling two-factor authentication, and being cautious of phishing scams.
Crypto investors can often adopt long-term strategies when it comes to their investments, as they may believe in the potential of a specific cryptocurrencies (be its influence on the finance or tech world, or simply its propensity to skyrocket in value for some given reason). Like stocks and bonds, others engage in more active trading as they attempt to profit from short-term price movements.
Again, like stocks and bonds investments, diversification in crypto investments can help manage risk. This might involve investing in a mix of well-established cryptocurrencies and newer, seamingly-promising projects.
Crypto Vs. Stocks: 8 Key Differences
As such definitions suggest, there are an array of factors that distinguish crypto investments from stock and shares. With this in mind, we’ll now explore 8 key differences of crypto vs. stocks, with these falling within the realms of assets, value, utility, dividends, regulation, trading hours, market maturity, and tangibility.
When it comes to differences in the actual assets involved, traditional stock investments represent ownership in a respective company. Often, this also means that investors - a.k.a. shareholders - are given certain rights within the company, such as voting powers on company decisions or access to shareholder meetings (to be explored later).
Ownership of company stocks also means that investors can claim on the company's assets in case of liquidation or bankruptcy. And when it comes to the actual asset types available to purchase, these often manifest as ‘common’ and ‘preferred’ stocks:
As the name suggests, ‘common’ stocks are the most prevalent type of stock. Here, their main feature is that they often come with the aforementioned voting rights and entitlement to a share of company profits. ‘Preferred’ stocks on the other hand don't often come with voting rights, however they offer priority when it comes to dividends and assets in case of liquidation.
Through operating on blockchains, ownership over cryptocurrencies is determined by possession of cryptographic keys rather than physical certificates. Unlike stocks, holding crypto doesn’t represent ownership in a company, as instead it simply represents ownership over the actual blockchain-residing token. With this in mind, the majority of cryptos can be seen as digital currencies that can be spent and traded on platforms that support them.
That being said, the more expansive premise of cryptocurrencies means that ownership can sometimes grant access to other rights and experiences, such as voting decisions on a particular digital governance ecosystem (often known as Decentralised Autonomous Organisations (DAOs).
The value of a respective stock is typically influenced by a company's fundamental financial metrics - such as earnings, revenue, profit margins, and growth potential. Here, analysts and investors use various financial ratios to assess the relative value of stocks, which include:
Fundamental Analysis: involves the study of a company's financials to determine its value. Metrics such as Earnings Per Share (EPS), Price-to-Earnings Ratio (P/E), Price-to-Book Ratio (P/B), Dividend Discount Model (DDM), and Discounted Cash Flow (DCF) are used.
Technical Analysis: focuses on a stock's price trends using historical data. Tools like Moving Averages, Relative Strength Index (RSI), Support and Resistance Levels, and Bollinger Bands are employed.
Comparable Company Analysis (CCA): compares a company's metrics (like P/E or P/B ratios) to similar firms in the same industry to gauge relative value.
Industry and Market Analysis: considers broader economic trends and market conditions that could affect a stock's performance.
Event-Driven Analysis: looks at specific events or news that might impact a company's stock price, such as earnings reports or regulatory changes.
Qualitative Analysis: examines non-financial aspects like management quality, brand reputation, and competitive advantage.
Risk Assessment: evaluates various risks associated with a stock, including industry-specific and company-specific factors.
Using a mix of these methods provides a more comprehensive view, as each approach offers different insights into a stock's potential value. Keep in mind that market conditions and unexpected events can influence stock prices, so diversification in analysis is recommended.
On the other hand, the value of the majority of cryptocurrencies are more ambiguous and entail a lot less calculated analysis.
Whilst coins such as Bitcoin and Ethereum derive their value through the respective utilities they possess today, many derive their values through the potential utilities they may possess in the future (which are often tied to the coin achieving mass adoption), as well as through pure price speculation. With regards to the latter, this is what we often see with memecoin phenomena such as Dogecoin (DOGE) and Pepe the Frog (PEPE) - two of many coins that have experienced noteworthy price pumps (and therefore noteworthy profit-taking opportunities) despite not hosting any substantial utilities beyond their speculation-driven price potentials.
With this in mind, there are no earnings or revenue metrics to evaluate when it comes to cryptocurrency investments, so the valuation is often more speculative and can experience rapid fluctuations. In the occasion where there are earnings or revenue metrics to analyse, these often entail factors such as market demand, adoption, technological developments, and network effects.
There’s also a caveat here in the form of ‘stablecoins,’ which are projects that are pegged to fiat currencies to offer a ’stable’ crypto investment wherein value fluctuations don’t occur.
As previously mentioned, stock ownership can offer both monetary and corporate utilities. With regards to the former, stockholders have the potential to receive financial returns through dividends and capital gains, whilst on the corporate side of things, they may receive rights to vote on company decisions (and even major corporate matters if they own enough stock).
Depending on the company in question, stockholders may also be invited to an array of corporate events and networking opportunities.
Given the expansive and creative scope of the crypto sphere, crypto ownership can offer an array of different utilities depending on the coins/projects you invest in.
For example - and away from any profit-taking opportunities - Bitcoin primarily serves as a store of value and medium of exchange, while tokens on platforms like Ethereum enable access to decentralised applications (dApps) and smart contracts. Additionally, there’s GameFi tokens such as Axie Infinity’s $AXS which serve as in-game currencies, exchange tokens which are needed for trading on crypto exchanges, and security tokens which are digital equivalents of traditional securities.
Wrapped and privacy tokens also offer alternative experiences for traders, as the former are alternative versions of even cryptos that can be held on different platforms (i.e. Wrapped Bitcoin (WBTC) operates on Ethereum, and has its price pegged 1:1 with BTC), whilst the latter - such as Monero (XMR) - allow users to engage in wholly private crypto transactions (as most on-chain transactions are pseudo-private in practice).
Some companies tend to distribute a portion of their profits as dividends to shareholders. Dividends therefore provide a direct return on investments in addition to any capital gains, and are typically paid-out in cash or additional shares.
As ever, specific dividend pay-out systems will vary from company to company.
Crypto projects generally don’t pay dividends to investors as crypto ownership doesn’t represent ownership in a company with profits. Instead, value appreciation (i.e. profit-taking opportunities) is derived from factors such as increasing adoption rates, technological advancements, and overall demand for the coin in question.
The traditional financial system is subject to some of the most intense and thorough regulation known to society, further meaning that traditional stocks investments also come with extensive regulatory oversight. In general, companies must comply with the legal and financial reporting requirements of their respective jurisdictions, which typically includes submitting quarterly and annual reports to regulatory authorities.
For example, the Securities and Exchange Commission (SEC) rules-over stock trades in the USA, with such agency being tasked with enforcing securities laws, ensuring fair market practices, and safeguarding the interests of investors.
On a global scale, companies that are listed on the stock exchange typically have to adhere to practices such as disclosure requirements, listing requirements, insider trading regulations, and proxy voting/shareholder rights.
Often coming with concerns and criticisms, cryptocurrencies largely operate in relatively new and evolving regulatory landscapes, wherein different jurisdictions offer varying approaches when it comes to imposing bans, enforcing strict regulations, or offering more lax and permissive frameworks.
More specifically, crypto regulations can entail the categorisation between securities, commodities, and currencies. Here, some may be considered securities that are subject to rigorous securities laws, while others may be classified as commodities which fall under the purview of commodity regulatory bodies like the Commodity Futures Trading Commission in the U.S. Additionally, certain cryptocurrencies may be regarded as currencies and thus regulated by central banks.
Issues of Anti-Money Laundering (AML) and Know Your Customer (KYC) can also come into play, as in many jurisdictions, cryptocurrency exchanges and platforms are required to implement AML and KYC procedures. This is to deter illegal activities such as money laundering and financing of terrorism.
Of course, taxes are also a topic of concern, however processes vary from one jurisdiction to another. Some countries treat them as commodities or assets - therefore subjecting them to capital gains tax - while others view them as a form of currency with specific tax implications.
Stock Trading Hours:
As is common knowledge, stocks are traded on established stock exchanges during specific market hours (which vary by exchange and region). Typically, trading occurs on business days, therefore meaning that it’s closed on weekends.
Crypto Trading Hours:
Simply put, crypto can be traded 24/7 as the cryptocurrency market operates globally and is not bound by centralised exchange hours or regional market schedules.
Stock Market Maturity:
As is common knowledge, the traditional stock market has a long history of institutionalisation that dates back centuries. It is therefore characterised by a high level of regulatory and corporatised lineage, including well-established regulations, infrastructure, and a wide range of investment strategies.
Crypto Market Maturity:
On the flip side, crypto is a relatively new market that’s emerged only in the last decade. As it’s still in its early stages of development, it still lacks some of the institutional structures and regulatory frameworks seen in traditional financial markets.
Stocks represent ownership in a tangible entity, a company with physical assets, operations, and often a workforce.
This means that shareholders have a stake in the company's physical and financial well-being.
Cryptos on the other hand are entirely digital and therefore lack a physical form. Through only existing on digital ledgers on the blockchain, they are intangible assets that rely on cryptographic keys for ownership and transfer.
Crypto Vs. Stocks: A Conclusion
In conclusion, crypto vs. stocks investments offer distinct opportunities and challenges.
On one hand, stocks represent ownership in companies and are subject to well-established regulatory frameworks, providing investors with a stake in tangible assets and potential dividends.
Conversely, cryptocurrencies are digital assets, often serving as a means of exchange within blockchain ecosystems whilst operating in a dynamic and evolving regulatory landscape. They also typically exhibit higher volatility and have unique utility functions.
In turn, understanding these fundamental differences is crucial for investors when navigating these two distinct but potentially rewarding investment avenues. And as ever, diversification and a clear understanding of individual risk tolerance remains a key consideration for building a well-balanced investment strategy.
FAQ: Crypto Vs. Stocks
What is the main difference between stocks and cryptocurrencies?
Stocks: Represent ownership in a company and provide a share of its assets and profits.
Cryptocurrencies: Are digital or virtual assets that rely on blockchain technology, often serving as a form of digital currency or utility tokens within specific ecosystems.
How are stocks and cryptocurrencies regulated?
Stocks: Heavily regulated by government agencies and exchanges. Companies issuing stocks must comply with various legal and financial reporting requirements.
Cryptocurrencies: Operate in a relatively new and evolving regulatory environment. Regulations vary widely by jurisdiction, with some countries imposing bans or strict restrictions.
Which investment tends to be more volatile, stocks or cryptocurrencies?
Stocks: While they can experience significant price swings, they are generally considered to be less volatile compared to cryptocurrencies.
Cryptocurrencies: Known for their extreme price volatility, with prices fluctuating dramatically over short periods due to factors like market sentiment, regulatory news, and technological developments.
Can you receive dividends from cryptocurrencies like you can with stocks?
Stocks: Yes, some companies distribute a portion of their profits as dividends to shareholders, providing a direct return on investment.
Cryptocurrencies: Generally do not pay dividends, as they do not represent ownership in a company with profits. Instead, value appreciation typically comes from market demand and technological advancements.
How do the trading hours differ for stocks and cryptocurrencies?
Stocks: Traded on established stock exchanges during specific market hours, typically on business days.
Cryptocurrencies: Can be traded 24/7, as the cryptocurrency market operates around the clock without any centralised exchange.
Which market is more mature, the stock market or the cryptocurrency market?
Stocks: The stock market has a long history, dating back centuries. It is characterised by a high level of institutionalisation, with well-established regulations, infrastructure, and a wide range of investment strategies.
Cryptocurrencies: A relatively new market, emerging in the last decade. It is still in the early stages of development and lacks some of the institutional structures and regulatory frameworks seen in traditional financial markets.
Are there physical certificates for ownership of stocks or cryptocurrencies?
Stocks: Traditionally, ownership of stocks was represented by physical certificates, but nowadays, most ownership is recorded electronically through brokerage accounts.
Cryptocurrencies: There are no physical certificates for cryptocurrencies. Ownership is determined by possession of cryptographic keys, and transactions are recorded on a digital ledger called the blockchain.
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This article is intended for educational purposes and is not financial advice.