The traditional stock exchange as we know it has many similarities with the cryptocurrency market, sometimes causing new investors to refer to them interchangeably without thinking twice. Still, at a fundamental level, there are some critical differences between the two that are important to distinguish.
What are Stocks?
A stock represents partial ownership in the amount of equity a holder has in a company, meaning that you are the owner of your amount of shares and the value thereof.
Let's say you purchase a large portion of Amazon stock. That makes you a part-owner (also known as a "shareholder") of Amazon. Being a shareholder means you are entitled to a percentage of Amazon's assets and profits, proportional to how much stock you own.
If you had purchased a large amount of Amazon stock back in the 90s, that would make you a multi-millionaire by 2022. As a shareholder, your financial interests stay protected by centralized bank exchanges, SEC regulations, and other regulatory bodies that ensure your investments and assets are safe, with minimal risk of scammers.
What are Cryptocurrencies?
Cryptocurrencies are digital assets that function across centralized and decentralized financial (DeFi) exchanges and blockchains that allow users to transact and invest in various digital goods.
Unlike stocks, people who invest in crypto aren't part-owners or holders of the entity or company; They only own the individual units of the cryptocurrency. There are ways in which crypto benefits its owners that stocks can't, such as staking rewards, where a percentage of a company's profits gets paid out to shareholders via periodic distributions.
Critical differences between Stocks and Crypto
As a shareholder, traditionally, you can count on regulatory bodies to keep you and your assets safe. Companies that issue stocks to the public have numerous laws to ensure the security of their investor's assets. However, these regulations can negatively impact investors by manipulating the market or freezing your assets (as seen in January, 2021).
On the other hand, cryptocurrency has more speculative risk when it comes to credible and long-term investments. Many people have gained millions of dollars with crypto. But, at the same time, many people have also lost millions. Terra Luna, a cryptocurrency considered a stablecoin, recently plummeted and cost investors more than $40 billion. This is why cryptocurrency education is critical to navigating the space safely.
Assets in the cryptospace, compared to traditional stocks and centralized exchanges, can be highly volatile. Some digital assets and various cryptocurrencies have shifted more drastically in 24 hours than most stocks have in an entire year.
Finding a cryptocurrency that is not volatile is challenging (if not impossible). The technology needed to back crypto exchanges is still developing to make cryptocurrencies a less risky investment for everyday people who don't have thousands of dollars to throw around.
Every traditional stock market has some form of KYC (know your customer) backlinking your data to a centralized exchange. You must provide your full name, address, and taxpayer identification number during the signup process before creating your account. It ensures that government bodies and tax agencies know who you are, what you earn on your investments, and how much of those investments are taxable, should you ever choose to withdraw your earnings.
With cryptocurrencies, this is rarely the case. Many decentralized exchanges aren't regulated, through which you can purchase cryptocurrencies without the need to give up any of your personal information. This anonymity can be good or bad, depending on how well you do your research on cryptocurrencies and platforms to not get scammed.
As mentioned before, people who are new to investing in cryptocurrencies, and don't spend enough time familiarizing themselves with this space, are most likely to get scammed or hacked.
Anonymity is the main reason behind the massive amount of malicious activity in the cryptospace. An individual could accidentally give access to their crypto wallet if they aren't careful, and scammers could move all their precious NFTs and assets to a different wallet. Because most crypto wallets don't offer a form of KYC, you wouldn't know who owns that wallet. This means users are primarily responsible for keeping their assets safe by taking several precautions.
What Drives the Market?
Both Stocks and Crypto represent ownership in the underlying company you put money into, where investors generally react based on future earnings expectations. When a company's developments look optimistic, investors typically buy more shares to reap a higher reward in the long run if the company follows through on its promises.
Which of the Two is Better?
In short, it depends on various factors, including your personal preference (DYOR: Do your own research), tolerance, risk, age of the company or asset, investment goals, and disposable income that you are willing to risk. Both stocks and cryptocurrencies allow investors to acquire various traditional or digital assets, meaning individuals can have investment portfolios that include both stocks and cryptocurrencies.
History is proving that traditional stocks and cryptocurrencies are here to stay. In the face of recent market crashes, volatility, and economic meltdowns, cryptocurrency has remained remarkably resilient to the backlash of centralized exchanges, even though it's not perfect yet. Regarding sustainability, many cryptos have become much greener than the proof-of-work Bitcoin rigs people used back in the day. The new, energy-conscious approach to blockchains makes them an attractive alternative to traditional stocks.
Whether you invest in stocks or cryptocurrencies, it's always wise not to put all your eggs in one basket. Instead, diversify your portfolio and only risk what you can afford to lose.
*All blogs are opinion pieces and do not necessarily reflect the views of PyxelChain Technology Corporation