Blog | Cryptocurrency

7 Ways Crypto Differs from Stocks: A Comprehensive Guide

Learn why you should not be treating crypto like a stock

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Summary

  • Understanding financial bubbles can help you thrive during financial crisis

  • Financial bubbles come and go - you have to know when, and how, to move

  • Investing in your financial education is the key to “getting” financial bubbles


The crypto and stock market may seem similar on the surface, but once you dive deeper, you’ll find that they are fundamentally different. Understanding these differences will help you make educated decisions when it comes to managing and investing in cryptocurrencies.

So, for those new to crypto who have some experience in traditional trading, let’s take a closer look at 7 key distinctions between the two and why they are important.

Are you ready to learn about crypto vs stocks? Let’s begin!

BTC Photo by Art Rachen on Unsplash

  1. Self-Custody

    What sets crypto apart from stocks the most is self-custody. In the past when you bought a share of a stock, they would send you the physical paper stock certificate and you could store it in a safe. That allowed you to have self-custody of your stock.

    These days, purchasing shares in a company is typically done through a broker like Fidelity, Vanguard, or Robinhood. The broker holds custody of the stock and you are granted “rights of ownership” which allow you to sell, receive dividends, and participate in voting decisions.

    Moving your stocks from one broker to another can be a time-consuming process, taking several days to complete. It may also come with fees and restrictions from the new brokerage firm you have chosen.

    In the world of cryptocurrencies, you have the option to keep your tokens on the crypto exchange, like a stock, or you can choose to self-custody and move your crypto into a wallet where you store the keys and access funds.

    No third parties are involved.

    In contrast to stocks held by financial institutions, crypto holders who choose to move their crypto off-exchange are responsible for managing their private keys and selecting safe storage methods such as hardware wallets or a secure app crypto wallet.

  2. Exchanges, Swaps & Peer-to-Peer

    When it comes to stock exchanges, your ability to exercise control over your ownership rights is restricted to selling the stock within the exchange. This means that the stock exchange acts as a middleman between you and the buyer.

    In contrast, crypto offers a wider range of options. In addition to centralized exchanges that offer a more traditional trading experience, there are decentralized exchanges (DEX), peer-to-peer networks, and the option to use your crypto as collateral and borrow a different type of crypto in its place.

    This allows for greater autonomy and agency in managing and trading your crypto assets.

    Quadrant Photo by GuerrillaBuzz on Unsplash

  3. Value & Liquidity

    When you invest in stocks, you become a partial owner of the company and its tangible assets and profits. The stock price ultimately depends on the company’s production of goods or services to customers and the expectations for future growth. This makes investing in stocks more secure, as there is much more information based on past performance available to guide investment decisions.

    Cryptocurrencies, on the other hand, are digital assets and typically lack physical assets backing them (although some may have assets, such as gold-backed tokens). Its value is determined by its usefulness, level of adoption, liquidity, and mainly speculation.

    The lack of tangible assets makes cryptocurrency a more volatile asset class.

  4. Trading Fees

    The fees associated with transactions in the crypto market can vary a lot due to factors like network congestion and which trading platform is being used.

    In contrast to traditional stock markets where brokerage fees are usually standardized, crypto trading fees may include additional costs like network fees (known as gas fees), exchange fees, and withdrawal fees.

    These fees must be paid using the actual cryptocurrencies, which can also affect profitability. For instance, if the value of popular cryptocurrencies such as ETH increases and you want to trade a token that operates on the Ethereum network, you’ll end up spending more money in terms of its dollar value because gas fees will also have gone up.

    Quadrant Photo by Oren Elbaz on Unsplash

  5. Trading Times

    One of the main benefits of the crypto market is its constant availability, with trading possible 24 hours a day and 365 days a year.

    This distinguishes crypto from traditional stock markets, which have specific trading times throughout the day and year.

    The downside to this continuous trading is the risk of volatility at all times, but crypto traders mitigate this by setting automatic stop-losses to sell their tokens if they drop below a certain price.

  6. Rules and Regulations

    Both stocks and cryptocurrencies are subject to following extensive regulatory frameworks, however, traditional markets have more defined lines than crypto. Some countries have decided to take a more friendly approach to crypto while others have imposed strict restrictions or outright bans on certain crypto activities.

    Learning how to traverse through the regulatory environment has become an important aspect for participants in the crypto market in order to keep up with compliance and control any potential legal risks that could happen.

    The world of crypto is a constantly evolving landscape, with regulations shifting and adapting as the market continues to evolve.

    Quadrant Photo by Shubham's Web3 on Unsplash

  7. Mining and Staking

    Cryptocurrencies like Bitcoin and Ethereum use proof-of-work or proof-of-stake to ensure transaction validity and network security.

    Unlike stocks, their value is not tied to a company's performance. Instead, there are smart contracts and the issuance and distribution of these cryptocurrencies are governed by consensus mechanisms, which can sometimes offer crypto-based rewards for participating in the network through mining or staking.

    Digital currencies focus on community involvement and efforts. The goal of this mechanism is to help incentivize more people to join and contribute to the cryptocurrency ecosystem and either help mine blocks or hold their tokens.

My Final Thoughts

In the debate of investing in crypto vs stocks, both while different, have important roles to play in the investment landscape. As you decide to venture into the exciting and rewarding world of investing, I highly recommend looking into the history and philosophies behind cryptocurrencies to truly understand their purpose. While the value of a token is noteworthy, it's also important to consider its mission and community efforts.

Generally, a broadly diversified stock portfolio offers more stability than cryptocurrencies, but digital currencies are easier to access and trade than utilizing the stock market.

Some digital currencies, like meme coins, may only hold value because individuals want to own them. Remember to practice proper risk management and seek professional investment advice, if you're new to crypto investing.

Ultimately, when it comes down to it, knowledge and education are what matter most in making decisions that align with your goals and risk tolerance.

Keep learning and remember that your mind is both your greatest tool and asset.

(Disclaimer: This article is not financial advice and is intended for educational purposes only. Our articles are not sponsored or affiliated with any of the businesses, tokens, teams, or protocols mentioned. It is important to conduct thorough research and only invest an amount that you are comfortable potentially losing. For personalized financial advice, consult a professional.)

Original publish date: April 10, 2024

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