Will Cryptocurrencies Replace Stocks?
Ok, that’s a big question to tackle in one blog post, but we’re not afraid of challenges. The stock market has been around for decades, and while it reigns over crypto in terms of market stability and volume, will this be the case forever?
In order to compare the two financial ecosystems, it’s important to cover the basics of how stocks and crypto assets work. So, let’s do that!
Simply put, stocks are a form of investment in a company often referred to as shares. These shares are given in exchange for money after the company launches or before (referred to as an IPO). They can also be given out internally, to employees or advisors, as an incentive to benefit from the company’s success.
Stocks fluctuate to varying degrees depending on the type. If things go well, shares increase in value and you get a nice return on your investment and the same goes the other way around. Below are the two main types of stocks and how they differ.
1. Common Stocks
These types of shares are the ones you’re probably thinking about when you hear the word “stocks”. Common stocks fluctuate quite a bit with major company decisions, and these changes directly impact shareholder holdings. In exchange for their trust in the company, stockholders also get to vote on decisions that could ultimately affect their assets.
2. Preferred Stocks
These stocks are often, well, preferred for the simple reason that they are more predictable. Preferred stockholders benefit from less volatility, but this comes at a cost. In addition to no voting, preferred stocks are callable. This means that the company can recall the shares anytime in exchange for a refund at the going rate.
Contrary to the name, cryptocurrencies also function as a form of digital asset. There are two types of cryptocurrencies based on their function which, in turn, has an effect on how they are regulated.
1. Utility Tokens
Utility tokens or app coins include most alt-coins and represent access to a company’s product or service. They are designed as a tradable asset.
2. Security Tokens
Security tokens derive their value from an external, traceable asset in addition to being affected by supply volume. Because of this additional feature, security tokens are often subject to securities regulations.
So, Will Crypto Take Over the Stock Market?
There are a few big reasons why the stock market won’t be going anywhere anytime soon. Despite the many advantages of cryptocurrencies as a form of digital asset in projects on and off the blockchain, it’s still not ready to take center stage in the world of finance. Here are just a few reasons why.
1. People like to stick with the safe and familiar
Rational thought does not always govern our decision-making. People, for the most part, prefer to stick to the things they know regardless of whether a less familiar option would be more beneficial.
But familiarity is only a part of this tendency to avoid risks.
After breaking into the mainstream majority in 2017, crypto markets experienced an unprecedented boom, followed by a foreseeable plummet that hit a lot of market participants and companies hard. The impression made on the public was that crypto is dangerously unstable, despite the fact that, during the same time period, the stock market also experienced one of its most volatile periods to date.
Confirmation bias makes this truth a little harder to digest. For many new crypto users, the crazy highs and lows is a big deterrent. In time, and as more and more cryptocurrencies embrace the benefits of legal recognition and compliance, the Cryptosphere will stabilize and redeem itself in the eyes of the cautious.
2. Cryptocurrency legislation is still in its infancy
Cutting out middle-men is what crypto was initially all about. Decentralization means fewer intermediary fees and more power in the hands of the actual asset holders, addressing the monopoly of banks and their skewed power over people’s finances.
This vision directly contradicts the way the current financial system works, which relies on centralized institutions (i.e. the Federal Reserve or European Central Bank) to determine how money is used. While financial laws help deter money laundering, fraud, and criminal activity, they also resulted in a bulky and bureaucratic system that benefits banks over the private consumer.
Cryptocurrencies don’t have such a burden, but this also means that they are difficult to integrate into the highly-centralized system of fiat finance. Establishing laws for crypto, without authorizing an authority to execute the consequences, is complex.
3. Many crypto exchanges and companies remain unregulated
Despite the legal challenges crypto faces, there have some great strides. There is an increased demand for legitimized crypto services, and forward-thinking companies – like CoinMetro – are taking regulations into their own hands.
Being strict with compliance laws and KYC/AML procedures, for example, is how we strive to give crypto the credibility it deserves. Many crypto services still get away with being loosely regulated, but based on how huge corporations, Facebook being the most recent example, are dipping their toes into cryptocurrencies, this will soon change for the better.
Stocks are Here to Stay and So Is Crypto
While cryptocurrencies have the potential to outshine stocks one day, for the moment both markets are here to stay. Diversifying your assets is important for any trader, so why limit yourself to one or the other?
If you’re looking to expand your crypto assets on a platform that is easy to use, fully licensed by the European Union, and offers a killer referral program then you’re in the right place. We’ll also throw in a 20 XCM reward as soon as you sign up and complete your first EUR to crypto trade with us.
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See you again soon!
The CoinMetro Team