What are the differences between cryptocurrency and company stocks? The core of the issue is in their respective uses. Currently, there is still some resistance among the public when it comes to the idea of cryptocurrency as an investment. But even so, digital currencies like Bitcoin are becoming increasingly popular assets in the eyes of day traders, portfolio managers or other financial professionals.
So how does crypto trading differ from standard share trading? Crypto speculators aim to make solid returns on price changes, just as they hope for when purchasing stock shares. However, there are many key differences between holding a virtual currency and holding a share of stock. Here are four ways in which crypto speculation differs from stock trading.
Spend one day following both the cryptocurrency and stock markets. You’ll learn very quickly that the coin market is highly volatile. One of the many reasons for the huge swings is panic selling by coin holders who fear huge losses. It’s not unusual for cryptos to surge in price, drop drastically, and then surge again, all within one or two hours on a typical day. This characteristic of cryptocurrencies is quite attractive to speculators who want to make large gains in a short period. As long as people understand that losses can be as great, and as rapid, as gains, placing money into an alternative coin can be a reliable way to play major price swings.
Deposit Compensation Schemes
Depositors who hold Bitcoin in their bank accounts are protected by deposit compensation arrangements in some jurisdictions, like the EU and Australia, for example. Each banking establishment has its own protocols but most allow for compensation to account holders in the event of bank failure. Called DSGs, for deposit guarantee schemes, the plans are not funded by taxpayer money but rather by the banks themselves. Including Bitcoin under the cover of such protection means the banking community considers the cryptocurrency to be a qualified deposit, on equal footing with other, more traditional currencies.
In most developed nations, governmental taxing authorities are still struggling to decide how to treat non-traditional forms of investment like Bitcoin and other crypto money. In Australia, transacting with BTC incurs a capital gains tax event and is not treated as a currency, per se. To cite another example, in the EU the popular virtual currency is viewed, legally, as a currency and thus not subject to the VAT. But, depending on which EU country the account holder resides in, a BTC transaction might incur a capital gains tax.
Voting Rights and Dividends
Some market enthusiasts are drawn by the idea of earning quarterly or annual dividends on shares of stock. Further, if you own even a single share of a company’s stock, you are entitled to cast a vote at annual meetings. This is simply not so with crypto. There is no voting of any kind and you never earn dividends.
In some important ways, share traders and cryptocurrency holders are in the same boat. Taxation treatment is quite similar for both, but the rules governing cryptocurrency is more complex simply because the world’s nations haven’t yet come to an agreement on standardized treatment. Virtual currencies remain much more price volatile than stock shares, a feature that attracts some and repels others.
When it comes to deposit compensation, virtual currencies are treated the same as cash by many banking systems. Finally, shareholders get corporate voting rights while crypto holders don’t. Virtual money is still relatively new so the next decade or two will almost certainly see some form of standardization. It’s doubtful that owning cryptocurrency will ever be the same as owning a share of stock. The instruments are just too different in their basic nature. One represents ownership of a company and the other simply represents a monetary asset.