Traditional investors, however, argue that an unregulated cryptosystem and its many outright scams make it too risky to maintain a sustainable financial structure. It’s essential for potential investors to understand the ins and outs of cryptocurrency and how it compares to traditional stock to efficiently plan and start a new investment portfolio. This is our beginner’s guide on crypto vs. stock market.
In simple terms, cryptocurrency is a digital asset that, at its core, is self-custodial, censorship-resistant, borderless, and fully transparent. It provides an alternative to traditional currencies like the US dollar or the euro, which are known as “fiat.” Cryptocurrency is decentralized, meaning that fiat authorities like central banks and governments don’t control it.
A stock, also known as equity or a share, represents the ownership of a fraction of a corporation. Companies issue stocks to raise funds for operation and expansion. Public stocks are initially available after a company launches an Initial Public Offering (IPO). Investors buy stocks for the opportunity to receive a return on investment (ROI). Stocks are "traded" on stock exchanges such as NASDAQ or the New York Stock Exchange (NYSE).
Markets are a place where individuals can trade one asset for another asset. Each asset has its own supply and demand. Usually, we think of price in terms of a unit of account, US dollars, but each good can also be considered as having a price related to other goods. For example, one can buy a gallon of milk for $4 or a dozen eggs for $2. We use dollars as a medium of exchange, but one could in this market trade a gallon of milk for two dozen eggs in a fair deal.
In the crypto world, we can substitute milk and eggs for two types of crypto assets (i.e., Bitcoin and Ethereum), and we have a market. Each crypto asset can be traded for another crypto asset or any other asset. These trades happen on cryptocurrency exchanges.
Owning Stocks and Cryptocurrencies
When somebody buys cryptocurrency or stocks, they are buying the asset much like how they would buy a car or a gallon of milk. An asset’s value changes over time, which depends on how valuable the market views the asset.
When someone buys Bitcoin, they are buying a certain share of all Bitcoin that exists. When the market values Bitcoin more, the value of that share increases, and when people value it less, the value of the share decreases. This is much like how stocks work. When investors buy stock in a public corporation, they purchase a fraction of that corporation that’s split into shares. The value of each share is directly related to how the market values the corporation.
So, what determines the value of these assets?
Valuing Stocks and Cryptocurrencies
Valuing stocks and cryptocurrencies is immensely difficult. Anyone who can do this well becomes exceptionally wealthy. An asset’s value is always tied to how much the market values it, but usually, there is some fundamental underpinning its value.
For cryptocurrencies, the fundamentals could be tied to usage, network size, utility, and popularity. Some even have their minimum value at any point determined by fundamentals. This includes Thorchain (RUNE), which is a decentralized liquidity network or a one-stop shop that enables users to swap assets. Its token value is at a minimum three times the total value locked in the ecosystem in optimal conditions. Knowing the token’s minimum value doesn’t mean one can predict the actual price, but this provides a floor.
Stock prices are also tied to fundamentals. These fundamentals are usually metrics like revenue, growth rate, and profit. Usually, stocks are discussed as having multiple underlying fundamentals (i.e., revenue multiplier and earnings per share).
Because cryptocurrencies are far more immature than traditional stocks, their fundamentals are much more difficult to predict, making them arguably more difficult to value.
Price is determined by the relationship between supply and demand. If a buyer purchases stock or crypto from another investor, they must "bid" the highest amount they're willing to pay. Bids are often lower than a seller's asking price. The difference between their bid and the seller's asking price is called a bid-ask spread. A trade takes place when both parties agree on a price.
Key differences between cryptocurrency and stocks
Although stocks and cryptocurrencies share many basic similarities, they differ in several key areas. For prospective investors, it’s best to understand the differences between cryptocurrencies and stocks.
Maturity of the market
Historically, stocks have a long and successful track record. Here's a brief timeline to illustrate the history of the stock exchange:
- 1611 – The Amsterdam Stock Exchange (ASE), the world’s first stock exchange, is established
- 1698 – The London Stock Exchange (LSE) is founded
- 1792 – 24 stockbrokers sign an agreement to create the NYSE, currently the largest stock exchange in the world
- 1971 – NASDAQ, now the second-largest stock exchange globally, is formed
- 2000 – The ASE is rebranded as Euronext, the largest stock exchange in Europe presently
Stock exchanges have become an essential part of our financial system. The NYSE manages around 2.4 billion daily transactions, while the LSE can process over a million.
Whereas cryptocurrencies are relatively new assets in the financial world. Only 3% of the world’s population has adopted crypto as a technology. However, companies like Worldcoin aim to put a share of cryptocurrency in the hands of everyone.
When someone purchases stock in a public company, they become a shareholder. The company’s success also determines the value of its particular stock. Ownership is guaranteed by local regulatory authorities.
When somebody purchases crypto, they own it because it’s in their own crypto wallet. There is no governmental or regulatory authority guaranteeing this ownership. It is written in code.
Because stocks are run through centralized markets, orders can only be processed by individuals and entities with set hours. This means that trading only occurs when these entities are open.
Cryptocurrency markets, on the other hand, are always live. Trades are permissionless and processed via code, meaning the market is open 24/7/365.
Cryptocurrencies are generally more volatile than stocks because of the uncertainty surrounding their future value. Many cryptocurrencies don't tie to tangible asset classes like fiat currencies or gold, making them unpredictable investments. Much of the volatility stems from it being an immature market and the assets being so difficult to value.
It’s essential to keep in mind, however, that even stock prices can experience unexpected spells of volatility from time to time. In early-2022, prices of big tech stocks decreased up to 80%!
Fees and regulations
Unlike stocks, the cryptocurrency community is not subject to central regulations and supervision. While this may sound good, it can lead to extreme volatility and a lack of stability. Governments are actively debating how to integrate cryptocurrencies into their existing financial systems.
However, regulated markets also come with fees. Users who want to invest in stocks may need to pay broker fees, bank charges, and taxes.
On the contrary, crypto exchanges have lower transaction fees, with some of these fees often being negligible.
Crypto vs. stock market: What to choose?
Now that we’ve understood the similarities and differences, the question is, which one should you invest in?
Risk-averse investors would consider stocks over crypto because of the high uncertainty and volatility, while cryptocurrencies are considered a higher-risk-higher-return investment. This is not a one or the other investment. Individuals can invest in both and should diversify to create a portfolio based on their unique risk profiles and worldview. Multiple investment vehicles can decrease risk, leaving less room for vulnerability to market volatility.
Cryptocurrency is the face of the digital age, so it’s certainly something worth exploring. Users who don’t want to pay their own money for crypto can even get it for free.
That’s right! Worldcoin aims to give every human on Earth a free share of its cryptocurrency. Users can participate in a growing digital economy and own a slice of Worldcoin’s decentralized system without paying a single penny.
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