Crypto vs stocks: What are they and their differences

Many investors have made a lot of money through the stock markets, however, in recent years a new asset class has entered the scene. Not just any asset class, the best performing asset in the last decade. While conservative investors have steered clear, many investors have incorporated cryptocurrencies into their investment portfolios. 

In this article, we explore the differences between crypto vs stocks. While investments are driven by profits, understanding the difference between the two and what each one is is arguably fundamental to making any money from them. 

What are stocks? 

Stock, also referred to as equity or shares, is a financial product sold by companies that offer a percentage of ownership in the company. These "certificates of ownership" entitle the holder to dividends from the company's market performance. 

Stock in a company holds equal risk and reward. Should the company have a bad year, the stock price will reflect this with a decline in the unit price, but should it perform very well the price will increase. The profits are shared through a simple transaction.

These financial products are legally considered securities and are used by businesses or governments to raise capital from the market, offering the holder part ownership in the company selling the stock. Stocks are traded on authorised stock exchanges, of which there are over 60 around the world. The most popular are NASDAQ and the New York Stock Exchange (NYSE) which manage the sales of stocks relevant to that platform.

What are cryptocurrencies?

Cryptocurrencies are digital assets native to blockchain platforms. The first cryptocurrency launched in 2009 and provided an alternative cash system that allowed users to transact and store their funds without the authorisation of a third party. As a solution to the global financial crisis plaguing the world at the time, Bitcoin offered a decentralised solution to people taking control of their own money.

Following the launch of development-focused Ethereum several years later, cryptocurrencies started to offer solutions beyond just payment platforms. There are over 2m cryptocurrencies on the market today, ranging from utility tokens to governance tokens to meme tokens. 

Cryptocurrencies are defined as using blockchain technology to facilitate and maintain the network. Blockchain ensures that all transactions are recorded in a public ledger for anyone to see and are immutable. They also use cryptography to ensure the security of the network established through an elaborate means of information.

Cryptocurrencies can be traded on the following platforms, each incurring its own fees:

• peer-to-peer exchanges, where cryptocurrencies are directly traded between two users.
• Decentralised exchanges, largely unregulated exchanges where there is no central authority.
• Centralised exchanges, operated as a business with an entity in charge and managing operations as well as regulatory obligations.

Cryptocurrencies are largely considered to be "digital commodities" around the world, however, most countries are in the process of building a legal framework to better identify and regulate the new asset class. Still, cryptocurrencies have become a widely popular investment vehicle for both retail and institutional investors. 

Do you have to pay taxes on cryptocurrency?

As is the case with profits gained from any investment, individuals are required to pay taxes on their crypto earnings. While this remains largely unregulated, most countries have created a legal framework that requires users to pay on any profits made. These levies are then paid to the government and contribute to the functioning of the country. The onus lies on the individual to establish what these laws are and adhere to them.

What are the difference between crypto vs stocks

Below we flesh out the differences between these two financial products to build a better understanding of the two. We'll be looking at:

Ownership 

Arguably the biggest difference between crypto and stocks is the ownership rights. Stock provides the holder with ownership rights vehicle cryptocurrency typically doesn't (in the traditional financial ownership sense at least). 

Cryptocurrencies are designed in such a way that their decentralised nature ensures that no one owns the network. Some cryptocurrencies provide governance rights that allow the holders to vote on network changes and have a say in the development of the project. 

Risk vs reward 

The cryptocurrency market is renowned for being more volatile providing considerably higher risks and rewards when compared to the stock markets. 

In a 5 year comparison, at the time of writing, NASDAQ has seen 167% growth while Bitcoin has seen 3,574% growth. 

Liquidity

Stock markets typically hold more liquidity as most stocks can be traded across exchanges and quickly converted to cash. Cryptocurrencies, particularly the smaller capped coins, hold less liquidity, although the bigger ones like Bitcoin and Ethereum can easily be traded on most exchanges. Bigger crypto exchanges have more liquidity due to the higher trade volumes on the platform. 

Regulation

Another big difference between crypto and stocks is the regulation aspect. While all stock exchanges have at least one government entity regulating all activity on the platforms, cryptocurrency is largely unregulated around the world.

Regulation in the crypto space is a developing topic as many countries are working to legally define the asset and implement it into their financial system. Having said that, most centralised exchanges are regulated, complying with laws in the countries in which they operate. For safe crypto trading ensure the platform you're using is regulated.

Investment reasons

While both stocks and cryptocurrencies are largely invested in for profit-seeking reasons, the alternative motivators vary substantially. Some investors also invest in stocks due to the initiatives that the company supports. 

Cryptocurrencies on the other hand offer several more alternative investment motivators, including:

• Getting involved in the blockchain and dapp space
• Making use of its decentralised nature and lack of centralised authority
• Exploring a more discreet means of transacting and storing value
• Supporting an innovative product that offers a high-impact solution

In conclusion

Stocks are a more popular and regulated investment vehicle while cryptocurrencies offer a higher risk vs reward opportunity. While stocks are considered securities are largely regulated, cryptocurrencies offer higher use case potential and have proven to have higher ROIs.

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