Crypto vs Stocks? Exploring Key Differences

Do you already hold or plan to start investing in cryptocurrencies and wonder how they differ from stocks? Let’s take a look.

Now that crypto markets have had wind in their sales and generated higher returns than stock markets over the past couple of months, it’s a good time to analyze their key differences and similarities. So, crypto vs stocks, what are the differences between them, and whether investing in stocks vs crypto is a better idea?

Cryptocurrency vs Stock Market

Both cryptocurrencies and stocks are financial investments that generate returns through price appreciation, as well as dividends in the case of stocks. They are both classified as risky assets as their returns aren’t guaranteed. All or parts of the capital initially invested can be lost. Their prices can fluctuate significantly following the release of macroeconomic or corporate data, geopolitical events and changes in legislation. Their prices can also take off or dive due to the general investor climate, which can be influenced by (fake) rumors, speculation or just investor psychology. Investors’ confirmation bias or loss aversion can play a major role. Both stocks and crypto assets are bought and sold on exchanges. But the similarities end here.

A stock represents the ownership of a share in a company, entitling shareholders to a portion of its profits in the form of dividends as well as voting rights. Their intrinsic value is calculated on the the company’s future profits, cash flows and more. Stocks are typically valued by earnings per share (EPS), book value or their price/earnings ratio (P/E ratio).

Crypto assets don’t grant shares of company, but are digital assets stored on a blockchain. Public ledgers are used to prove ownership. Blockchain technology is then used to create, verify and secure the transactions carried out. Contrary to stocks, cryptocurrencies have no intrinsic value. They are not backed by a physcial asset like gold or a house, nor by any government guarantees. Their value is based on market demand and supply. Their prices can be buoyed by speculation and also impacted by network usage.

Liquidity is another key difference, with the amount of stocks exceeding $100 trillion compared to that of the crypto universe at a mere $2.5 billion. The liquidity on crypto markets can thus be thin, especially when the three largest crypto assets are excluded. The combined market cap of Bitcoin, Ether and stablecoins reaps 72 percent of the crypto universe… This leaves a relatively thin liquidity for the other many thousands of crypto tokens being traded. Furthermore, there are thousands of crypto exchanges too to choose from, so the spreads between buyers and sellers can be significant.

Another main difference is that cryptocurrencies aren’t (yet) heavily regulated. But regulators around the world are flexing their muscles and slowly but surely introducing regulations in the crypto sphere. The EU’s comprehensive Markets in Crypto Assets (MiCA) regulation, which entered into force in June 2023, sets the tone. This step is welcomed by many market participants, who demand clear rules rather than face the legal uncertainty that exists in the US, for example. There, the Securities and Exchange Commission (SEC) and other authorities have taken actions against several crypto players, resulting in multibillion settlements or lengthy litigations. The SEC considers that all cryptocurrencies, with the exception of Bitcoin are securities, while other US authorities, including the Commodity Futures Exchange Commission (CFTC) define them as commodities.

The maturity of the two asset classes is incomparable. Stocks have been around for centuries. Since 1602 to be more exact, when the Dutch East India Company issued the first shares. By comparison, cryptocurrencies are newcomers. Bitcoin was created in January 2009, Ethereum went live in July 2015 and Tether’s stablecoin USDT in October 2014. The crypto universe is thus far less mature and as earlier mentioned less regulated.

Investing In Stocks vs Crypto - Final Word

Right now, however, the returns of crypto assets beat those of stocks by a mile. The price of Bitcoin has rallied 60 percent since the beginning of the year compared to the S&P 500’s and Nasdaq’s 8 percent in the US. Japan’s Nikkei index is the best performing index among the larger ones, with a 16 percent return since Jan 1. But as with any investment, there are risks associated with both asset classes. Your decisions must be tailored to the risk that you are prepared to take.