What is the Difference Between Stocks and Cryptocurrency?
Differences in stocks and cryptocurrency as they relate to Web3 technology.
On the surface it is easy to think that stocks and cryptocurrencies are similar, but they are actually more different than they are similar with certain nuances covered in this article.
How Stocks and Cryptocurrencies are Similar
Stocks and cryptocurrencies have some similarities, but most of these are surface-level similarities and aren’t really fundamental similarities. For instance, a major similarity of stocks and cryptocurrencies is that both can be used as an investment vehicle. Many people buy stocks and cryptocurrencies hoping to sell them at a later date for a profit.
Another similarity between stocks and cryptocurrencies is how they are bought and sold, using brokers and exchanges to purchase them with fiat currencies. This is generally where the similarities between stocks and cryptocurrencies end, with one nuance.
While the similarities listed above are basically the only real similarities between stocks and cryptocurrencies, there is an important nuance to this discussion that is necessary to highlight. While this isn’t technically a similarity, stocks can be cryptocurrencies. I know that may sound confusing, and the better term for this is crypto asset or Security Token.
There are a handful of companies such as Overstock.com, Exodus Wallet, and other companies that have listed their common stock on the blockchain. You can actually purchase their common stock in the form of a token and hold it in your cryptocurrency wallets. So, while not all stocks are cryptocurrencies (crypto assets), and not all cryptocurrencies are stocks, stocks can be cryptocurrencies, and cryptocurrencies can be/represent stocks.
How Stocks and Cryptocurrencies are Different
To understand how cryptocurrencies and stocks are different, it’s important to get a broad overview of what exactly a stock is and why cryptocurrency doesn’t fit this description. A Stock is a financial instrument (a security) that is used to raise capital. If you own a company, and have a public offering, the general public is then allowed to own a small piece of your company. This is generally a fantastic aspect of capitalism.
The general public uses information provided by the company (and verified by auditors and government agencies to avoid fraud) regarding how strong the company is. If the company is growing, making lots of money, innovating and expanding into new markets, the general public can choose to purchase a small piece of the company (shares of common stock).
As the company continues to grow, demand for their stock and the market value of the company will increase. When these things increase, the value of the general public’s shares will also increase, allowing them to sell it at a profit. A criticism of billionaires having too much money is actually entirely the fault of the general public.
Tesla, Apple, Amazon, Facebook among many other companies have had public criticism that their CEOs and Founders are worth hundreds of billions of dollars. This isn’t the fault of any of these CEO’s (unless you consider creating a valuable company their fault, which in a sense it is).
The real fault for these obscenely wealthy individuals is the general public, who purchases their stocks, and thus increasing the value of them. If Amazon wasn’t the most convenient service possibly on the planet, Jeff Bezos wouldn’t be worth $200 billion dollars.
Why wouldn’t you buy Amazon stock? It’s a very strong company that has produced amazing returns for the general common stockholders over the last 15 years. Early public investors may even have gotten rich themselves thanks to Amazon.
Now that we have a broad overview of stocks, and the companies they represent, let’s dive into why cryptocurrency is very different. To draw an analogy, cryptocurrencies are more similar to the gasoline in your car, or the oil that heats your house. Cryptocurrencies act as the fuel for a blockchain network to function.
Similar to how oil is valuable, cryptocurrencies can be valuable if their blockchain is widely used and has strong functionality. Cryptocurrencies are not financial instruments that represent the value of a company, they are fuel. The bitcoin network only functions because people transact bitcoin. All cryptocurrencies are generally the same in this.
While it’s true that the founders of some cryptocurrencies got very wealthy because they hold lots of tokens, similar to how Elon Musk owns a significant number of Tesla shares, it’s still fundamentally different. If you discover oil on your property, you might get very rich from it, but that doesn’t make oil a stock.
Cryptocurrencies and stocks are also different because you can spend cryptocurrencies in exchange for goods and services, hold them in a self-custody wallet (think cash buried in the couch), and they don’t represent the value of something else.
While no cryptocurrencies are considered legal tender in the USA (or most of the world), private transactions in bitcoin have seen people purchasing houses, jewelry, and many other items. You can’t buy a house with Apple stock unless you sell it first. If a merchant accepts cryptocurrency, you can exchange bitcoin for those goods.
- While they appear similar on the surface, stocks and cryptocurrencies are very different
- You can technically issue company stock on the blockchain, and thus a stock can be a cryptocurrency(asset) and vice versa
- A stock is a financial instrument and investment vehicle used to represent the value of a company. The more valuable the company, the more valuable the stock.
- Cryptocurrencies are more similar to fuel, as they power the blockchain they are native to. If a blockchain network (i.e Bitcoin) becomes more valuable, the value of the cryptocurrency will increase in tandem.
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Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.