Robert Steinadler, a year ago
Most people think of Bitcoin when they come across the term “cryptocurrencies”. While it is true that Bitcoin was the first crypto ever to be invented, a lot of other digital assets got developed over the last ten years. Many of them resemble similar features like stocks or just plain and simple trying to replace stocks and stock trading as we all know it.
This begs the question of what the difference is between cryptocurrencies, crypto assets, and stocks. In this article, we are diving down a little deeper and taking a closer look at those questions.
Stock trading reaches back to the year 1585 and it is needless to say that this particular asset class is very well established. It can yield long or short-term returns which makes it interesting for different types of investors. Crypto on the other hand was born in the year 2009 with the start of Bitcoin.
While stocks can sometimes face high price volatility it is almost certainly guaranteed that crypto assets will. Therefore, crypto is often considered to be the riskier asset class.
A stock represents the partial ownership of equity in a business. It also reflects on the value of the business even though the market can be irrational and price the stock over or under the fair value of the company. That being said, the stock price is moved by different factors such as the company’s revenue, total economic growth, and also good or bad news. Even events that are totally happening outside a business can have an impact on the price if the market perceives them as related.
Cryptos are entirely different from stocks. Cryptocurrencies are based on their own blockchain and unlike fiat currencies, the monetary policy is defined by a protocol instead of a central bank. Tokens are also part of crypto and they usually run on top of a blockchain and can serve different purposes that can be freely defined and executed by a smart contract. Examples would be a utility token, a stablecoin or an NFT.
Therefore, they can serve a variety of use-cases which includes tokenized equity in a company like a stock but is not limited to it. In fact, most cryptos are not affiliates with equity at all.
Instead, they offer the opportunity to speculate on the price development or to gain income by staking, mining, lending or yield farming. Another use that applies to crypto is that it can be a medium of exchange or a store of value.
Both asset classes can be used to build a portfolio or trade them short-term. There are a few notable differences in doing so. As we already pointed out before, buying or owning crypto doesn’t come with equity in a company. That is only the case when buying a security token offering, which is very rare.
While crypto investors can receive passive income from staking or lending, no dividend is involved. In fact, most opportunities to gain additional income by holding crypto require some sort of activation or investment of the crypto assets.
Last but not least, the stock and crypto markets are very different. Stocks can usually only be traded on weekdays and within working hours. The crypto market on the other hand is always available and never sleeps.
Both asset classes have their pros and cons or limitations. Please note that the decision to invest in an asset class should be done after careful consideration. Generally speaking, each investor has to weigh the ratio between the risks and rewards of his investments.
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