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Сryptocurrency VS Stocks

Nov 24, 2021

Stocks as financial instruments. History of stock trading

The “stock market” functions as the marketplace for trading with financial assets known as securities. The latter represent debt securities, equity securities (shares of companies, or stock), and derivatives. The primary focus of our review is on stocks.

Like with many other inventions, the history of stocks, or shares, dates back to Roman times. Speculations with property and commodities became common in ancient Rome. During the time of the Roman republic, wealthy contractors created special societies (societates publicanorum) for managing their business. The ownership of these societies was divided into shares or partes. Although we don’t have accurate and full facts about trading and speculation with these shares, it was Rome that introduced shares as the trait of ownership. Fast forward to Europe of 12 — 14 centuries, the early and informal commodity market was known as a bourse.

Stocks in the modern time

The market of stocks in its modern sense came into existence in the 17th century with the establishment of the Amsterdam Exchange and the emergence of the first publically traded company — the Dutch East India Company. The subsequent trading process was boosted by the activity of East India companies set by European empires. Those companies were seeking to finance their voyages through investors by issuing stocks. These stocks, or shares, could be traded further. With the South Sea Bubble, the British government banned issuing of shares till 1825 and solely allowed for public shares for the royally chartered enterprises. The New York Stock Exchange (NYSE) was formed in the late 18th century and managed to become the most influential trading spot. Since that time, national and specialized stock exchanges had evolved. The top position among exchanges had been held by NYSE till the 1970-s when NASDAQ, the first electronic exchange, came to prominence. Big tech companies list their stocks on NASDAQ. It is also the spot offering major cryptocurrencies.

Stock indices

Talking about stocks is impossible without discussing stock indexes. The stock index shows how the current prices of a certain subset of stock have changed over time, providing crucial data for the estimation economic conditions of the largest companies and economy as a whole. Nasdaq Composite, S&P 500, and Dow Jones Industrial Average are the most followed indexes in the stock market.

History of Cryptocurrencies

As compared to stock indexes, the history of cryptocurrencies is somewhat very recent. The idea of digital cash was first discussed in the 1980-s. Also, this type of money could provide the possibility of anonymous transactions. A cryptographer David Chaum published the first proposals on electronic money and established Digicash. Along with that, a “Cypherpunk’s manifesto” was created by Eric Hughes to promote the idea of encrypted transactions. In 2002, Adam Black came up with Hashcash currency that employed a proof-of-work algorithm.

The concept of a fully decentralized cash epitomized by Bitcoin came later and was created by engineers or an individual known under the moniker of Satoshi Nakamoto. Bitcoin did not need any banks to circulate and was based on a radically different approach. All transactions were conducted on a peer-to-peer basis between users. Sharing basic characteristics with traditional money (fungibility, scarcity, divisibility, etc.), Bitcoin relies on mathematical properties more than on physical backing.

Cryptocurrencies as financial instruments

Unlike stocks, the primary function of cryptocurrencies is a store of value. They also have properties of financial instruments upon exchange or participating in other types of activities, allowing for yielding interest. Virtual currencies often perform as securities, especially in the case of blockchain tokens.

Stocks VS Cryptocurrencies: comparison by parameters

Now that the definition of cryptocurrencies and stocks is given, let’s match these assets by certain parameters.

1. Technical use and procedure

In terms of technical access, both assets have an electronic form and require certain authentication in order to be accessed. However, stock trading requires a more nuanced approach and takes a procedure that depends on your goals. Before starting your journey with stocks, be ready to answer the following questions:

– Will you trade stock for quick speculation and proceed with order-takers, or need a full money-management system for your capital?
– What is your investment fund or emergency fund?
– Will you trade on your own, use robots, or rely on a fund manager?
– What type of account do you need? It could be a standard brokerage account or an individual retirement account. In the latter case, you need to set a minimum contribution threshold.

In order to acquire stocks, you’re expected to set up a brokerage account, which is now an online process. You may have an interaction with the chosen broker via the phone or any other means of communication. Nowadays, brokers are not attached to any physical point of sale. At the same time, local regulation can impact your choice of broker and the type of securities traded. Before your trading process starts, you’ll need to fill in an online application. If you trade on your own, download and install the recommended trading platform.

The procedure varies when it comes to cryptos. If you treat cryptocurrencies as a tool for trading speculations or decide to purchase of one those digital coins, then the above-described routine with stock trading applies to you very much. Keeping an account with a crypto exchange platform often requires the disclosure of personal information. If you limit your crypto deals to anonymous blockchains, the number of steps and interactions with third parties is close to zero. Start your hard wallet or mobile applications, hit transaction buttons and that’s it.

2. Convenience

Both stocks and digital currencies in their modern form are easy-to-use with technical differences being almost negligible. Whether you store cryptos on your hardware device or access it online, it’s as easy and intuitive as keeping an online account with stock exchanges or running the specialized platform software.

A big plus of cryptocurrencies is 24-hours market access. Cryptocurrency markets are open even during holidays whereas stock trading is restricted to schedules.

3. Investment potential and volatility

In terms of investment potential, both assets can be equally promising initiatives. On average, public shares have more chances to gain growth over a longer amount of time. By contrast, the volatility of cryptocurrencies can change drastically, causing significant loss or gain. Since shares are the indicators of the economic conditions of public companies, their price movement is much more predictable.

4. Legal status and ownership

Stocks provide their holder with a piece of a company to own. The benefit of receiving dividends on stock logically derives from this right. Most cryptocurrencies do not provide their owners with any legal entitlement. However, tokens with voting and ownership rights can be an exception.

For example, this is the case with the Security Token Offerings.

After buying crypto, you own a certain amount of digital money. In other words, crypto mostly functions as a store of value. Stocks represent a piece of ownership or equity, in the first place. At the same time, we can treat crypto as security expecting profit from the investment.

The crypto market is not regulated by any central authority whereas stock trading is a subject of strictly defined rules and regulations. The history of stock trading supervision is longer and backed by a greater amount of precedents than that behind cryptocurrencies. With the rapid development of the digital economy, those two will have a larger conflating area with implications for regulative agencies.

A famous Howey test determines whether an asset is a security and, therefore, if it can be treated as a security by financial regulators. This test seeks to define if an asset implies the investment of money; if it sets the expectation of profit; if this investment is in a common enterprise; and, finally, if any profit comes from a promoter or third party. By all these accounts, in some instances, a cryptocurrency may perform as security. The status is defined by interpretation of a regulative entity and, therefore, the relevant regulations may be applied to digital coins. For example, European regulations distinguish between payment, utility, and investment tokens. However, the majority of cryptocurrencies are not subject to any regulation.

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