When I started my crypto journey I was made to believe that it is very similar to investing in stocks. Okay, the market might be a lot more volatile, but the underlying principle remains the same. You pick a fundamentally sound crypto, invest and wait for your gains. Three years down the line, I wish it were that easy. Correlating stocks and cryptos for drawing a parallel conceptually is absolutely fine. We do that because stock markets are way older than crypto and everyone can relate to those terminologies. However, considering both these assets as absolutely similar to each other is a rookie mistake. So today, we talk about some key elements that reflect the stark difference between them. What is the difference between crypto and stocks? Let’s get started.
A. Issuing Authority:
Filing for an IPO is a herculean task in our country. Even globally, one cannot simply get their company listed in the stock market. There is an elaborate standard operating procedure governing that.
For example, in India, SEBI regulates the stock market and has laid down the following process for getting listed on Bombay stock exchange.
There is a significant money and preparation involved for filing an IPO in the stock market.
When it comes to cryptocurrencies, any one can come up with a token. Don’t believe me? Here is a list of five cryptocurrencies that had no chance of getting listed if someone were to audit them:
- PornRocket
- CumRocket
- Useless Ethereum Token (UET)
- TrumpCoin
- PutinCoin (PUT)
Even our favorite cryptocurrency Dogecoin was developed by two bored engineers who wanted to make fun of digital money. Cryptos are launched in the market through various modes like ICO (initial coin offering), IEO (Initial exchange offering), IDO (Initial DEX offering). More on these modes in another blogpost. For now, let’s focus on the fact that no government agency is involved in doing the due diligence of these launches. So, they are relatively riskier.
B. Ownership:
When you purchase the stock of Apple, you become a part owner of the company. Depending on the amount of shares you hold, you become an actual partner of X% of the company.
Whenever a key strategic decision is due, as a shareholder, you can also cast your vote on it. This empowers the shareholders and ensures that they have a skin in the game.
On the other hand, cryptocurrency wouldn’t give you ownership of the project in any way. All you have is a token that is somehow being put to use in that cryptocurrency ecosystem.
Complicated much? Let’s take an example of biggest public blockchain: Ethereum. When you hold ETH, which is the native token of the blockchain, you don’t get to own a piece of Ethereum blockchain. Instead, you have a token which fuels the projects running on Ethereum blockchain. This also means that if the demand for ETH>supply, your token will appreciate in value. You are not making money on profits or losses of the ETH blockchain, but on it’s popularity instead.
C. Fractional Buying:
Blockchains, especially Bitcoin, intend to democratize money. This trait is perhaps the best example of it. As I am writing this, one share of Berkshire Hathaway is about $420,285. It is almost impossible for a retail investor like me to invest this amount of money in a single share. Therefore, only rich would have access to stocks like these.
On the other hand, one BTC costs $46,000 currently. But I don’t have to buy one complete Bitcoin. I can own as low as a tenth of Bitcoin (called Satoshi). Same applies for all the cryptocurrencies. Some exchanges allow you to start your journey with as low as Rs. 100.
D. Regulations and Frauds:
Stock markets are regulated across the globe via local bodies. For example, SEC does this job in USA, SEBI is the stock market watchdog in India.
For crypto market, I wouldn’t say it is unregulated, but rather self regulated by the virtue of underlying blockchain technology. However, since government body is not involved here, risk increases manifold. It would be hard to trace your stolen funds in a decentralized ecosystem.
With that being said, no surprises for guessing that stock markets are relatively safer when it comes to fraudulent activities. Crypto market is full of scams and more often than not, innocent advisors lose their money.
E. Fundamentals and Valuation:
Stock markets are very mature. BSE started way back in 70s and NSE began trading in the 90s. This means a lot of work has been done to evaluate the companies listed in these exchanges. There are mathematical models, valuation techniques which can help you determine if a stock is overvalued or undervalued. This is possible mainly because the underlying asset of a stock is a company. This company runs a business which in turn posts profits or losses. All financial ratios (audited by agencies) for these companies are available on a public domain.
Coming to cryptos. It is just a decade old phenomenon. Most of the crypto projects don’t have a headquarter or office for that matter. Interesting fact: world’s largest cryptocurrency exchange, Binance, does not have any address attached to it.
Rather than relying on the financial ratios (like stocks) a lot of underlying value is determined by the social influence attached to the project. A trash project can be a huge hit if some billionaire tweets about it. Therefore, whatever money you put in cryptocurrency can be called speculation at best.
Of course there are some metrics which could give you a rough idea on valuating a project but who knows if the information available in public domain regarding those assets is correct or not.
F. Volatility and Rewards:
Stocks generally exhibit stable trends. I remember when the SENSEX fell about 20% during the pandemic panic, everyone was talking about it. On the other side of the spectrum, Bitcoin crashed about 40% from it’s top lately, and everyone seemed to be okay with it. Of course a lot of people list money, but the overall sentiment was fine(ish).
Which brings me to the next difference. Crypto markets aren’t for the faint hearted. On 7th September 2021, 7PM IST, Bitcoin came crashing down from $53,000 to $42,000 within an hour. A total of 3L+ investors got rekt. By 10 PM it moved back to $47,000. If this isn’t roller coaster ride for real, I don’t know what is.
But just like every asset class, higher the risk, higher are the rewards. Every week I would find some or the other crypto giving 300% returns. This is unheard of in stock markets. Not to forget that SEBI caps the movement of stocks in either direction using something called circuits. This prevents sudden spurts in prices by halting the trading for a certain period when this circuit (or cap) is hit. This is also called cooling off period.
G. Trading Sessions:
Another difference that makes crypto markets even more serious is the trading session. Stock markets in India operate for about 250 days in a year from 9AM till 3:30 PM in the noon.
In contrast, crypto markets are open 365 days a year, 7 days a week and 24 hours a day. Since you don’t need a person/organization/authority (decentralization) to to run these markets, they can operate all the time.
Conclusion:
if you still haven’t realized this, we belong to a generation where our parents consider stock market as gambling. They are in absolute love with their fixed deposits and real estates. Good luck convincing them for your crypto endeavors.
Secondly, I would suggest each one of you to start your crypto journey after understanding about blockchains. Money is a by product of this future changing technology. If you are well versed with it, opportunities would be ample.
Were you aware of these differences between crypto and stocks?
Got questions? Want to take it to the next level? Reach out to me using your preferred platform from the links below
Until next time..
Psst.. Struggling to save money?
I just managed to save Rs. 10,000 by investing my ‘Chillar (Change)’ in mutual funds. Investing amounts like Rs. 5, 8, 25, 45.. and 4 months later, Boom! I have 10 grand to spare. Interested in knowing how I did it? Read more here.
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On a side note, I use CoinMarketCap for all my crypto related research. You can access it through multiple modes. Sharing the links below:
2 responses to “What is the Difference Between Crypto and Stocks?”
Insightful read, for any newbie this is gold!
Thanks a lot Atul. Glad you liked it. ☺️