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Are crypto currencies replacing stocks?

cryptos replacing stocks

July 12, 2021 | 

1071 Views | 

JOHN K MWANIKI | 

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Thanks to Bitcoin and some altcoins, cryptocurrencies have become a common topic of discussion when people are discussing investment opportunities. Of course, many people know that cryptocurrencies aim to replace fiat currencies in the future, but there is now speculation that they may replace stocks too. In this article, we will attempt to answer this question. But before going into that, we need to explain what stocks and cryptocurrencies are and how they are diff from each other. 

What are stocks?

When you buy the stocks of any company, you purchase the shares of that company and become a stakeholder. Shares can be sold after the company’s launch or before its launch through IPOs (Initial Public Offerings). Generally, there are two types of stocks, i.e., common stocks and preferred stocks. Those who buy shares buy them through the stock exchanges. In most cases, if you have common stocks, you can vote on the decisions the company makes and receive dividends besides having partial ownership of the company. 

What are cryptocurrencies?

Cryptocurrencies are blockchain-based digital financial assets. Some cryptocurrencies are launched after ICOs (Initial Coin Offering), which are similar to IPOs in that they are a form of fundraising for the project. Investors during ICOs get crypto tokens from the company. There are two types of tokens, utility tokens, and security tokens. 

Difference between cryptocurrencies and stocks

Now that you understand what stocks and cryptocurrencies are, here are five significant differences between them. 

  • What you own - When you invest in cryptocurrencies, you own tokens or coins. When you invest in stocks, you gain shares, an indication of partial ownership of the company.

  • Volatility - While both stocks and cryptocurrencies experience volatility, cryptocurrencies experience more volatility than stocks. 

  • Governance - To protect investors and ensure fair trade, federal agencies have control over the stock exchange. 

  • Operational hours - Cryptocurrencies can be traded 24/7/365, while stocks are often traded during business hours on weekdays except for holidays. 

  • Localization - Cryptocurrencies can be traded by anyone anywhere around the globe. It is often easy to invest in stocks in your country, and investing in foreign stocks can be a complicated process. 

The problems facing cryptocurrency investing.

There are two sides of the camp regarding cryptocurrency investment (if you ignore the neutral parties). Some believe that they are the future of currency, and others believe they will go die out. While there are many good arguments for cryptocurrencies, here are three big issues that need to be addressed. 

1.    Cryptocurrencies are still in their infancy

The world’s first organized stock exchange, the Amsterdam Stock Exchange, was opened in 1611. This means that stocks have existed for at least 400 years. On the other hand, the first cryptocurrency, Bitcoin, was launched in 2009 by Satoshi Nakamoto. People are familiar with what stocks are and how they work but are still struggling to understand what cryptocurrencies function and the underlying blockchain networks that run these cryptocurrencies. 

Many people believe that cryptocurrencies are a bubble like the Tulip Mania that will eventually burst. Whether it is a bubble or not is yet to be determined. There is, however, no doubt that there is a lot to be understood about them and more to be done before they become commonly accepted in broader society. As an investment option, cryptocurrencies still have some hurdles to overcome before becoming as widely accepted as stocks. 

2.    Cryptocurrencies are largely unlegislated

As mentioned earlier, one of the selling points of cryptocurrencies is that they enable peer-to-peer exchanges by cutting out intermediaries.  By cutting out these intermediaries like banks and other financial institutions, they can allow faster and cheaper transactions and give people control over their money. However, even though legislation mainly benefits the intermediaries over the consumers, it also helps control and prevents fraudulent behavior. 

Without legislation, it is difficult for traditional financial institutions to be integrated with cryptocurrency’s decentralized systems. So the question becomes, how do you regulate a decentralized system without introducing a centralized authority? 

3.    Crypto exchanges are unregulated

As was mentioned, stock exchanges are typically regulated by federal agencies. For example, in the U.S., stock exchanges are regulated by the U.S. Securities and Exchange Commission. However, many cryptocurrency exchanges remain unregulated or loosely regulated. According to a 2018 study by Statista, 40% of those surveyed said that the most significant issue faced by cryptocurrency traders in crypto exchanges is insecurity. There have been many issues of scandals, fraudulent behavior, and hacking in crypto exchanges which makes it harder for new participants to venture into the crypto space.

Since it is difficult for outside regulators especially traditional financial regulators, to regulate a decentralized system, the only viable option is for crypto exchanges to self-regulate. They can do this by making sure traders follow KYC/AML procedures and enforcing compliance laws.

Are crypto currencies replacing stocks?

Taking all the prior information into consideration, you can now see that the answer to that question is no. However, despite this, cryptocurrencies are still disrupting stocks and the stock exchange market. 

Recall that shares often give investors partial ownership of a company, give them voting rights, and entitle investors to dividends. Additionally, nobody can go to a stock exchange to buy stocks. Instead, you have to buy through a broker or a brokerage company.

Now consider that some tokens given to investors in cryptocurrency ICOs can provide the owners with rights to vote, ownership rights, and maybe even dividends. Therefore these tokens can be considered cryptostocks. Also, consider that investors can own these tokens independent of stock exchanges as these purchases are recorded in a block in the blockchain. This implies that using blockchain technology, cryptocurrencies could challenge how stocks are bought and sold. 

Conclusion

While there is no doubt that cryptocurrencies will have a significant effect on the financial industry as a whole, it may be inaccurate to say that cryptocurrencies will replace stocks. Cryptocurrencies’ blockchain technology can improve and impact many industries, and stock trading is one of them. This means that even though cryptocurrencies will not replace stocks, they will likely change how stocks are bought and sold by removing the middlemen and altering our concept of equity ownership as we know it today. 

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