Investing in Cryptocurrencies vs. Stocks: What’s the Difference?

Changes in the World of Asset Trading and Investing

Perhaps you’ve noticed an explosion in both cryptocurrency and stock investing among the broader global population. Investing in assets — both traditional and digital — isn’t just for the wealthy; rather, both are endeavors that a wide range of people can participate in to build wealth. So, how does investing in cryptocurrency compare to investing in equities? In this article, we clarify the key similarities and differences between these two asset classes.

Similarities Between Stock Trading and Cryptocurrency Investing

Today, most investors simply log on to a digital exchange, brokerage account, mobile application, or other online platform to engage with financial markets. Most stock and crypto platforms offer a similar user experience in regards to layout, order-book-based liquidity mechanisms, and trading options. It’s easier now than ever to buy and sell stocks, and cryptocurrency exchanges have made investing in digital assets just as simple as investing in traditional markets.

Retail trading platforms generally offer access to the same basic trading order types: market, limit, and stop (or stop-loss). As a refresher:

• A market order is an order to buy or sell an asset as soon as possible at (or near) the current bid (for a sell order) or ask (for a buy order) price. A market order guarantees that the order will be executed, but does not guarantee the price.

• A limit order is designed to buy or sell an asset at a specific price — or better if possible. A buy limit order can execute at the limit price or lower, and a sell limit order can execute at the limit price or higher.

• A stop (or stop-loss) order is used to mitigate excessive losses. It is an order to buy or sell a stock once the price of a security reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.

Most decentralized crypto exchanges (DEXs) currently offer market orders only, but the full range of orders (market, limit, stop orders, and others) exist on most established centralized exchanges (CEXs). These options are expected to be added to more crypto exchanges as the crypto trading ecosystem matures over time. While buying and selling stocks and cryptocurrencies might appear very similar on platforms that have been designed for streamlined user experiences, there are many major differences in engaging with these two very distinct asset classes.

Investing in Crypto vs. Stocks: Main Differences

Ownership: The most important distinction between investing in stocks and cryptocurrencies comes down to the fundamental difference in what you’re purchasing. Shares of stock traded on a stock market are securities that represent a percentage of ownership (or equity) in a company: the company that’s issuing stock, or the issuer. Stocks typically grant their owners certain entitlements, such as voting rights or a portion of the issuer’s profits, in the form of dividends. In contrast, cryptocurrencies vary widely in terms of how they are used and what they are intended to represent.

Many digital assets — such as ether (ETH), basic attention token (BAT) and vechain token (VET) — are utility tokens that are meant to be used within a blockchain-enabled ecosystem, and do not represent a legal stake in the organization that issued them. There are also many cryptocurrencies that do not have demonstrable use cases tied to actual business operations and are intended as a store of value, like bitcoin (BTC) or the spectrum of stablecoins. These assets are best conceptualized as digital commodities — like gold — but they still do not represent any stake in a business or its operations.

The design and ownership implications of each individual cryptocurrency varies widely from one project to another. Many cryptocurrencies — aside from most stablecoins — can fluctuate significantly in value, even if they were not specifically designed to serve as investments or monetary units. As with traditional securities, or any type of investing, it’s critical that you research the cryptocurrencies you’re considering prior to purchasing them.

Further, although many digital assets do not represent a legal stake in the issuing organization, certain types of crypto security tokens are in fact designed to act like stocks: They represent an equity stake in an issuing company, in addition to having other programmable characteristics. In many jurisdictions, these tokens are subject to the same regulatory requirements as securities.

Market access: For the vast majority of investors, stock trading is generally restricted to set business hours. For example, stock exchanges based in North America tend to operate between the hours of 9:30 a.m. – 4:30 p.m. eastern standard time. On the other hand, crypto markets never close, not even on holidays. This makes it easier for people to take new positions and enter — or exit — the market whenever they want, regardless of where they live.

Issuance limits: Publicly traded companies that issue stocks may have the option to issue new shares, subject to the company’s internal regulations and any relevant local laws. By contrast, a cryptocurrency’s total supply is subject to the issuing organization’s internal policies or the blockchain protocol code it was designed with — it is generally not contingent on laws or policies. Moreover, crypto projects can easily and transparently set hard caps on their total cryptocurrency supply in a way that is provable and unalterable.

Trading pairs: Whereas stocks are typically purchased and sold with fiat currencies, buying and selling cryptocurrencies may involve the use of trading pairs, where two cryptocurrencies can be directly exchanged for each other. Because bitcoin (BTC) and ether (ETH) are two of the most commonly traded cryptocurrencies, most trading pairs involve one of these crypto assets. If you want to trade one altcoin for another, you will likely need to first exchange the altcoin you want to trade with something more common like BTC. Then, you can exchange that BTC for your desired altcoin.

Different crypto platforms and exchanges offer different trading pairs, so if you want to avoid multiple steps when exchanging one low-market-cap coin for another, you might want to use one of the many DEXs that can execute these types of trades using automated market makers (AMMs). While most stock brokerages offer fiat on- and off-ramps, not every crypto exchange lets users deposit and withdraw fiat. This means that on certain exchanges, you can’t purchase crypto assets using fiat.

Other Variations in Crypto and Stock Markets

Liquidity: Investors may encounter low liquidity when trading low-cap coins and tokens, or when buying and selling on smaller crypto platforms. Liquidity issues also exist in stock trading, particularly when dealing with micro-cap companies or over-the-counter (OTC) penny stocks.

Transparency: Publicly traded companies are mandated by law to maintain a certain level of transparency — usually in the form of quarterly financial updates, annual reports, regular shareholder meetings, and other official means of updating investors on past performance and expected future earnings. While companies that raise funds through a Security Token Offering (STO) may have similar reporting requirements, generally speaking, crypto projects are not subject to the same level of regulatory scrutiny as publicly traded companies.

Because the legacy financial services system in the U.S. has existed longer than the crypto ecosystem, it has its own governing bodies — like Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), and so on. Each governing body has its own set of rules and regulations, including stipulations on what types of data a publicly-traded corporation must make publicly available.

In contrast, many crypto markets do not require individual projects to publish their data regularly, so it can be harder for investors and industry analysts to accurately assess how certain crypto projects are performing, and whether these projects’ assets are a worthwhile investment. That said, many crypto projects do strive to be transparent in terms of regular community updates and open governance. And one of the main tenets of crypto and blockchain is transparency, to which most high-quality projects want to adhere.

The Future of Crypto and Stocks

Although digital assets and equities present very different investment opportunities, the traditional stock market and the crypto ecosystem are fast converging to form a new digital economy. Projects like Synthetix and Terra are working toward bringing traditional stocks to the blockchain using synthetic assets. And, because of a powerful array of blockchain-powered oracles linking traditional financial databases to crypto markets, investors will soon be able to buy and sell their favorite stocks on decentralized marketplaces across the globe — and around the clock.