As more investors and speculators flock to cryptocurrencies as an asset class, many have started likening them to stocks. While crypto and stocks share specific characteristics, they are fundamentally different.
Key Highlights
While crypto and stocks share specific characteristics, they are fundamentally different.
Differences include differences in supply, technology, purpose, and regulation.
However, as the cryptocurrency market matures, we may see more similarities between these asset classes.
Cryptocurrency vs Stocks – Similarities
Let's start by looking at the similarities between cryptocurrencies and stocks.
1. Risk and volatility
It should be no surprise that cryptocurrency asset prices have been quite volatile. In Figure 1 below, from the Refinitiv market data system, you can see that the cost of Bitcoin (in orange) and the tech-heavy NASDAQ 100 stock index have experienced quite a lot of change over the last five years.
Figure 1: Price History of Bitcoin and NASDAQ 100 (from Refinitiv)
It means that both holders of Bitcoin or a basket of technology stocks would have experienced price changes over the past five years. However, the degree of price changes with Bitcoin is significantly higher, as shown in Figure 2.
Figure 2: Price History and One-Year Percentage Change of Bitcoin and NASDAQ 100 (from Refinitiv)
This chart has the same price history over the past five years but is overlaid with the price change as a proxy for price volatility. The line in blue represents the one-year percentage change in the price of Bitcoin, and the yellow line represents the same one-year percentage change in the NASDAQ 100 index. Here, you can clearly see that Bitcoin's volatility is much higher.
2. How they are transacted
Another similarity between cryptocurrencies and stocks is how both assets are bought and sold. Platforms such as Robinhood, Wealthsimple, and SoFi have started blurring the lines between digital assets and legacy financial products. Users can access and trade their stocks and cryptocurrencies using the same frictionless platform.
3. Scams
Given the temptation of quick money, it is no surprise that both equities and cryptocurrencies suffer from fraudulent behavior. One of the most common is the “Pump and Dump” scam. Like we often see in penny stocks, unscrupulous parties artificially inflate the price of the cryptocurrency through false or exaggerated statements, celebrity “endorsements,” or simply investor greed (FOMO).
Once the price goes up, the fraudster unloads its holdings and, in most cases, disappears. Crypto data firm Chainalysis estimates $2.8bn in crypto “pump and dump” scams for 2021.
4. More and more common investors
Despite cryptocurrencies' nascent nature, more and more institutional investors are investing in cryptocurrencies, digital assets, blockchain technology, and decentralized finance (DeFI). These professional investors will require greater transparency, liquidity, and regulation in cryptocurrency assets, which can be viewed as a positive for the market as a whole.
Cryptocurrency vs Stocks – Differences
As we started by saying, there are still many fundamental differences between stocks and cryptocurrencies.
1. Supply
Some cryptocurrencies, the most famous being Bitcoin, are limited in their supply. However, other cryptocurrencies do not have a ceiling on how much can eventually be mined or minted. Stocks, on the other hand, tend to be less variable, as the amount of shares outstanding is controlled and ultimately backed by the operations of the issuing company.
Another consideration is the absolute size difference between global stock markets and cryptocurrencies. As of 2021, the amount of stocks outstanding globally was estimated to be $106 trillion, while the total size of crypto markets was only $2.6 trillion, a mere 2.5% of the much more significant equity or stock market.
2. Regulation
Equities, or stocks, are generally scrutinized by securities and other regulators in their country of origin. Additionally, for stocks that trade in an organized exchange, the exchange also provides oversight of the company and may delist the company should anything go wrong. While this does not provide a guarantee, it is certainly more than any safeguards when investing in cryptocurrencies.
Furthermore, cryptocurrencies are based on the concept of decentralization, which allows the trustless peer-to-peer exchange of value over the Internet without any intermediaries. In fact, the appeal of cryptocurrencies for many is the fact that the identities of the sender and receiver of cryptos are hidden, unlike traditional stocks.
3. Purpose
Speaking of exchanging value, many cryptocurrencies were designed as transactional cryptocurrencies, meaning they are meant to be digital currencies or coins.
On the other hand, when one purchases a stock, they buy a fractional ownership share in the issuing company. However, when one purchases a cryptocurrency, they are not necessarily getting fractional blockchain ownership – just a medium of exchange.
Yes, some projects are a token that may represent partial ownership and voting rights for a project. Still, for the most part, a cryptocurrency is closer to owning a currency or commodity, like gold.
4. Technology
The last and most important difference between stocks and cryptocurrencies is the blockchain that underpins all cryptocurrencies. Many cryptocurrencies allow for programming to be added, changing the nature of the crypto asset into programmable money.
Other use cases can be built upon specific cryptocurrencies, such as smart contracts and DeFi uses, like Dapps (decentralized applications). The only uses for stocks are capital appreciation, dividend cash flow, and voting rights.
Will the Two Assets Become More Similar?
While the market cap differs, certain changes bring the two asset classes closer together. As the cryptocurrency market matures, we are seeing the development of more financial derivatives and products that are commonplace in stocks.
For example, Bitcoin and Ethereum futures trade on reputable futures exchanges, such as the Chicago Mercantile Exchange (CME). These futures markets allow institutional investors to trade contracts or agreements to buy and sell cryptocurrencies at a pre-agreed later date in a developed and transparent manner via established exchanges.
It allows investors to buy a future claim to a digital currency, take a negative view of that cryptocurrency, and sell it short. These futures are cash-settled, and trades are conducted on an established and regulated marketplace by going through an exchange.
Cryptocurrencies have also taken a page from Stock Exchange Traded Funds, called ETFs for short, which now invest specifically in Bitcoin and other cryptos. An ETF is like a mutual fund but is bought and sold over an exchange, so they have decent liquidity.
ETFs have been around for a long time and tend to be very lightly managed instead of tracking the performance of an asset or an index. As such, they normally charge lower fees than a traditional mutual fund.
As platforms like Allo continue to innovate and expand their offerings, they play a vital role in shaping the future of on-chain stocks. By providing user-friendly interfaces, robust security measures, and a wide range of on-chain assets, these platforms make it easier for investors to participate in this new financial system.
