What is the Difference Between Stocks and Cryptocurrency?
Differences in stocks and cryptocurrency as they relate to Web3 technology.
On the surface it is easy to think that stocks and cryptocurrencies are similar, but they are actually more different than they are similar with certain nuances covered in this article.
How Stocks and Cryptocurrencies are Similar
Stocks and cryptocurrencies have some similarities, but most of these are surface-level similarities and aren’t really fundamental similarities. For instance, a major similarity of stocks and cryptocurrencies is that both can be used as an investment vehicle. Many people buy stocks and cryptocurrencies hoping to sell them at a later date for a profit.
Another similarity between stocks and cryptocurrencies is how they are bought and sold, using brokers and exchanges to purchase them with fiat currencies. This is generally where the similarities between stocks and cryptocurrencies end, with one nuance.
The nuance
While the similarities listed above are basically the only real similarities between stocks and cryptocurrencies, there is an important nuance to this discussion that is necessary to highlight. What is the difference between stocks and cryptocurrency? While this isn’t technically a similarity, stocks can be cryptocurrencies. I know that may sound confusing, and the better term for this is crypto asset or Security Token.
There are a handful of companies such as Overstock.com, Exodus Wallet, and other companies that have listed their common stock on the blockchain. You can actually purchase their common stock in the form of a token and hold it in your cryptocurrency wallets.
So, while not all stocks are cryptocurrencies (crypto assets), and not all cryptocurrencies are stocks, stocks can be cryptocurrencies, and cryptocurrencies can be/represent stocks.
The difference between stocks and cryptocurrency lies in their nature and use cases, but the lines blur with crypto assets.
How Stocks and Cryptocurrencies are Different
Stocks
To understand how cryptocurrencies and stocks are different, it’s important to get a broad overview of what exactly a stock is and why cryptocurrency doesn’t fit this description. A Stock is a financial instrument (a security) that is used to raise capital. If you own a company, and have a public offering, the general public is then allowed to own a small piece of your company. This is generally a fantastic aspect of capitalism.
The general public uses information provided by the company (and verified by auditors and government agencies to avoid fraud) regarding how strong the company is. If the company is growing, making lots of money, innovating and expanding into new markets, the general public can choose to purchase a small piece of the company (shares of common stock).
As the company continues to grow, demand for their stock and the market value of the company will increase. When these things increase, the value of the general public’s shares will also increase, allowing them to sell it at a profit. A criticism of billionaires having too much money is actually entirely the fault of the general public.
Tesla, Apple, Amazon, Facebook among many other companies have had public criticism that their CEOs and Founders are worth hundreds of billions of dollars. This isn’t the fault of any of these CEO’s (unless you consider creating a valuable company their fault, which in a sense it is).
The real fault for these obscenely wealthy individuals is the general public, who purchases their stocks, and thus increasing the value of them. If Amazon wasn’t the most convenient service possibly on the planet, Jeff Bezos wouldn’t be worth $200 billion dollars.
Why wouldn’t you buy Amazon stock? It’s a very strong company that has produced amazing returns for the general common stockholders over the last 15 years. Early public investors may even have gotten rich themselves thanks to Amazon.
Crypto
Now that we have a broad overview of stocks, and the companies they represent, let’s dive into why cryptocurrency is very different. To draw an analogy, cryptocurrencies are more similar to the gasoline in your car, or the oil that heats your house. Cryptocurrencies act as the fuel for a blockchain network to function.
Similar to how oil is valuable, cryptocurrencies can be valuable if their blockchain is widely used and has strong functionality. Cryptocurrencies are not financial instruments that represent the value of a company, they are fuel. The bitcoin network only functions because people transact bitcoin. All cryptocurrencies are generally the same in this.
While it’s true that the founders of some cryptocurrencies got very wealthy because they hold lots of tokens, similar to how Elon Musk owns a significant number of Tesla shares, it’s still fundamentally different. If you discover oil on your property, you might get very rich from it, but that doesn’t make oil a stock.
Cryptocurrencies and stocks are also different because you can spend cryptocurrencies in exchange for goods and services, hold them in a self-custody wallet (think cash buried in the couch), and they don’t represent the value of something else.
While no cryptocurrencies are considered legal tender in the USA (or most of the world), private transactions in bitcoin have seen people purchasing houses, jewelry, and many other items. You can’t buy a house with Apple stock unless you sell it first. If a merchant accepts cryptocurrency, you can exchange bitcoin for those goods.
Pros and Cons of Investing in Cryptocurrency vs. Stocks
Pros of investing in cryptocurrency
- High Potential Returns. Cryptocurrencies, especially newer ones, can experience massive price surges, offering high returns for early investors.
- Decentralization. No central authority controls cryptocurrencies, providing more autonomy and independence from traditional financial systems.
- Liquidity and Accessibility. Available 24/7 for trading on global exchanges, making it accessible to anyone with an internet connection.
- Blockchain Transparency. Transactions are recorded on public ledgers, offering traceability and reducing fraud.
- Diversification Opportunity. Cryptocurrencies are a separate asset class and can provide portfolio diversification.
Cons of investing in cryptocurrency
- Volatility. Prices can fluctuate dramatically, leading to potential high losses in a short time.
- Regulatory Risks. Cryptocurrencies face uncertain regulations in many countries, which could impact their adoption and value.
- Security Risks. Exchanges and wallets can be hacked, leading to loss of funds.
- Limited Historical Data. Cryptocurrencies are a relatively new asset class, with less data to guide investment decisions.
- Complexity. Understanding blockchain technology, wallets, and private keys can be challenging for new investors.
Pros of investing in stocks
- Established Market: Stocks have a long history and are well-regulated, providing more stability and investor protection.
- Dividend Payments: Many stocks pay dividends, offering a steady income stream in addition to capital appreciation.
- Lower Volatility: While not risk-free, stocks tend to have less dramatic price swings compared to cryptocurrencies.
- Wide Variety: Investors can choose from a broad range of industries and companies, providing ample diversification opportunities.
- Access to Company Growth: Investing in stocks allows you to benefit from the growth and profitability of well-established companies.
Cons of investing in stocks
- Market Hours. Stocks are only traded during market hours, limiting trading opportunities.
- Lower Short-Term Gains. Stocks typically grow steadily over time, with fewer opportunities for quick, high returns compared to crypto.
- Management Risks. Company mismanagement or poor performance can negatively impact stock prices.
- Fees and Costs. Brokerage fees, commissions, and taxes can eat into profits.
- Economic Dependency. Stock markets are more directly influenced by global economic conditions, which can lead to downturns during recessions.
Which is Right for You?
- Risk Tolerance. If you can handle high volatility and risk, cryptocurrency might be more suitable. Stocks are better for conservative investors.
- Time Horizon. Stocks are better for long-term investment; crypto offers both short-term trading opportunities and potential long-term rewards.
- Diversification. Consider including both in your portfolio to balance risks and returns.
Understanding your investment goals and conducting thorough research is crucial before investing in either.
Key Takeaways
- While they appear similar on the surface, stocks and cryptocurrencies are very different
- You can technically issue company stock on the blockchain, and thus a stock can be a cryptocurrency(asset) and vice versa
- A stock is a financial instrument and investment vehicle used to represent the value of a company. The more valuable the company, the more valuable the stock.
- Cryptocurrencies are more similar to fuel, as they power the blockchain they are native to. If a blockchain network (i.e Bitcoin) becomes more valuable, the value of the cryptocurrency will increase in tandem.
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Author:
Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Disclaimer
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.