Cryptocurrencies and stocks are two distinct and exciting global markets to trade. Before deciding which to trade, it’s important to understand how these asset classes differ in structure, regulation, and risk profile.
- What’s the difference between cryptocurrencies and stocks?
- Market hours
- Market valuations
- Volatility
- Regulations
- Applications
What are the differences between cryptocurrencies and stocks?
The main difference between cryptocurrencies and stocks is how they function as asset classes. Stocks represent units of ownership in a publicly traded company, while cryptos are digital assets built on blockchain networks that can be traded or used for transactions.
Ownership of company shares allows you to earn dividends and, in some cases, vote on major business decisions. Cryptocurrencies function as investment vehicles and tools to perform transactions on blockchain networks.
Compared to stocks, cryptocurrencies are evolving and changing every day, and their newness and high volatility translate into a high-risk asset class.
The decision on whether to trade cryptos or stocks should come down to which you are most interested in and your risk appetite, but there are additional factors worth considering.
Market hours
When a market is open and experiencing its highest trading volume is a significant factor in deciding what to trade. Your preferred time to trade may be different from the next trader. It all depends on when you have time to monitor the markets and how much time your trading strategy requires.
Stock exchanges are open at different times depending on the country they trade in. For US exchanges like the New York Stock Exchange and the Nasdaq, trading hours are 9:30 AM to 4 PM ET. These markets are also closed on most national holidays.
The cryptocurrency market, however, operates 24/7. Trading activity is heightened during normal business hours, usually 8 AM to 4 PM ET. These extended hours mean crypto traders may need to spend more time monitoring their trades, but it also allows you to react to news and volatility immediately instead of having to wait for the market to open.
Market valuations
Stocks and cryptos have vastly different factors when evaluating their worth.
When trading stocks, it’s important to focus on direct fundamental factors of the company such as debt levels, cash flows, and seasonal earnings. You should also look at larger economic data and news reports regarding the company’s sector.
For cryptocurrencies, the largest price drivers are the technologies associated with the currency, like the Ethereum blockchain which hosts the digital currency Ether. It’s also important to understand the developmental details of specific tokens. This includes when and how more coins are introduced into circulation, the cost of the crypto’s production such as mining requirements, and what plans the cryptocurrency’s developers have for the future.
Learn more about what drives cryptocurrency prices
Volatility
Volatility is a measure of how likely price swings may occur in a market. A market with high volatility will see an asset’s price rise and fall dramatically, while a market with low volatility exhibits more gradual price changes.
The stock market tends to exhibit relatively stable price patterns that can be easily tracked over time, while cryptocurrencies are known for their extreme or erratic volatility. Popular cryptocurrencies have been known to soar upwards or bottom out within a relatively short timeframe.
For example, Bitcoin’s price rose from less than $1,000 in 2017 to $19,000, before falling back to $8,000 by mid-2018. The stock market can also exhibit high volatility like this, but its price swings typically don’t oscillate so quickly.
Past performance is not indicative of future results. Crypto assets are speculative and can lose significant value.
Regulations
Regulations and fees are one of the starkest differences between stock and cryptocurrency exchanges. Stock exchanges have existed for hundreds of years, and during that time many rules and governing bodies have been established to regulate the market and protect traders. Fees are common when trading stocks, brokers typically charge a commission fee, banks will charge you for payments, and capital gains are taxed.
Cryptocurrencies have few regulations in comparison. This lack of regulation and government oversight has been a major draw for traders. Crypto-asset platforms operating in Canada, must be registered under securities laws Crypto enthusiasts argue that the decentralized nature of blockchains eradicates the need for regulation from a central authority. Others support greater regulation for cryptos to open different ways to trade them, such as developing futures contracts and options to go short.
Regardless, the lack of regulations imposed on cryptocurrencies helps keep the costs of crypto exchanges relatively low. Beyond mining fees, there are fewer costs associated with blockchain technology, which hosts cryptocurrencies. Crypto exchanges themselves demand relatively low fees when buying and selling digital currencies.
Applications
The applications of the two asset classes mark another stark divide between stocks and cryptos. After hundreds of years, the use cases for company shares are clearly defined. They function as a vehicle for companies to raise additional funds and traders to speculate on the health and success of a company.
Cryptocurrencies, meanwhile, have dozens of use cases depending on the blockchains they are developed for, and that number is expected to grow with the rise of decentralized finance. As developers create more applications for blockchains and digital tokens, and cryptocurrencies become a more popular vehicle to conduct transactions, the value and market of cryptocurrencies will continue to grow.
Learn more about cryptocurrencies
Crypto assets are highly volatile and may not be suitable for all investors. You should ensure you understand the risks before trading. Past performance is not indicative of future results.
This content is provided for informational and educational purposes only and should not be construed as investment advice. FOREX.com Canada does not currently offer digital currencies or cryptocurrency trading
