Trade has a history as long as history itself, however, stock exchanges as we know them are a relatively new phenomenon - well at least 400 years new…
Today, with an exchange in almost every country, stock exchanges provide vast marketplaces for the buying and selling of currencies and commodities across the globe.
Created to facilitate the buying and selling of cryptocurrencies, cryptocurrency exchanges are an even newer addition to the global marketplace.
Cryptocurrency exchanges and stock exchanges have one key thing in common, which is they facilitate trade. However, the way assets are traded, the volatility of the market, as well as a number of other factors are where the two types of exchanges differ.
In this article we’re going to explain the key differences between cryptocurrency and stock exchanges.
What are the main differences between stock and cryptocurrency exchanges?
1. Assets traded
Type of assets
This is the primary difference between cryptocurrency exchanges and stock exchanges. A stock exchange trades in company stocks or shares, while a cryptocurrency exchange trades in cryptocurrencies (digital currencies), such as Bitcoin, Ethereum and many more.
Asset ownership
Shares traded on stock markets represent equity in a company. When you buy shares in a company via the stock exchange, you become a part owner of the company itself. How well the company is doing also determines the value of your shares.
The purchase of cryptocurrency - be it coins or tokens - does not necessarily represent partial ownership of the company that issued it. It’s a digital currency so the value of it is subjective. Cryptocurrency is much easier to own than stock. Read this article for more information on bitcoin and how it works in Australia.
Issuance of assets
Subject to local laws and company regulations, a publicly traded company may issue shares at will in order to raise money. In contrast, most cryptocurrencies have a capped number of coins or tokens. For this reason, basic economics would suggest that (all other factors considered) the value of viable, capped cryptocurrencies would increase as demand for them grows.
2. Maturity of the market
Stock exchanges have been trading far longer than cryptocurrency exchanges and are therefore more mature. Regulations and local laws govern their activities and stock exchanges also receive government backing. Companies must also provide transparency to shareholders by making market activity public including quarterly financial updates and minutes of general meetings.
Given their maturity, stock exchanges have high volumes and diversity of trade. The maturity of the stock market has, however, given ample opportunity for some traders to dominate trading circles. This can be to the disadvantage to smaller investors because the stock market rewards bigger investors with lower fees or commissions on trade.
Cryptocurrency exchanges, on the other hand, are still young and in a state of continued development. Although there are moves to increase the regulation of exchanges to boost investor confidence, much of their activities currently sit outside regulatory and political spheres. Given their short history, the volume and diversity of cryptocurrencies being traded is also far less than that of stock exchanges.
3. Volatility
When it comes to markets, volatility often arouses extreme caution. In reality, market volatility can be considered in both positive and negative lights.
Low volatility means a more stable market (and hence investment); however, this often also means a longer wait for financial reward. This is often the case with the stock exchange.
Large trade volumes increase the stock market's stability and make it less prone to the movements of 'big fish' traders. That said, given its connections with governments and corporations all across the globe, the stock exchange is frequently impacted by geopolitical events.
By comparison, cryptocurrency exchanges experience greater volatility. The market is new, so its highs and lows are very pronounced, which makes the cryptocurrency marketplace vulnerable to the trade movements of 'whale' traders. A whale trader is someone who owns a large amount of bitcoin. This means that the whole market can be vulnerable to the trade decisions of those heavily invested. For example with the news of influencer Elon Musk investing $1.5 billion in Bitcoin in January 2021, the price of bitcoin suddenly jumped 17% to a new record high.
However, because cryptocurrencies sit separate from governments and other global institutions they are - to a large extent - insulated from political influences.
4. Market reach
Want to start trading on the stock market? Well, be prepared to wait awhile.
Given the maturity of the stock exchange and the myriad rules and regulations that have developed around it, the process to begin trading can be time consuming and energy intensive.
You'll need to find yourself a broker and once you have one, you'll need approval to buy and sell. Furthermore, trading is restricted to business hours. As you can start to see, access to the stock market is controlled.
On the contrary, cryptocurrency can be traded at any time and on any day, regardless of public holidays and major events. Anybody has the capacity to trade in cryptocurrencies, making it much more accessible to people of all social standings. Getting started is a relatively straightforward process and cryptocurrency exchanges stay open 24 hours a day, which allows for swift trade movements.
5. Fees and regulations
This is a pronounced point of difference between stock and cryptocurrency exchanges.
Stock exchanges have grown to be heavily regulated marketplaces. There are rules in place to protect traders and investors; to help keep the playing field fair.
In addition to rules there are also fees, and the costs associated with traversing the stock exchange are relatively high. Brokers charge a fee or commission, banks will charge you to make payments and capital gains are taxed.
Trading on cryptocurrency exchanges incurs relatively fewer costs. The costs associated with transacting on the blockchain are minuscule, consisting only of mining fees. Exchanges themselves thus incur lower costs when buying and selling cryptocurrencies, than brokers for stock exchanges.
Cryptocurrency exchanges are - to date - still comparatively free from regulation. There is, however, support for greater regulation of the cryptocurrency marketplace. Only time will reveal the nature of rules and regulations applied to the cryptocurrency marketplace.
Cryptocurrency exchanges: Looking to new horizons
What does the future hold for cryptocurrency and exchanges?
Well, no one really knows for certain.
The original goal of cryptocurrency was for it to one day be an accepted form of payment like cash or credit card. While that hasn’t happened yet, there is gaining interest in cryptocurrency and many people who regret not investing in it earlier when the price was lower.
For many crypto traders and investors, the hallmarks of cryptocurrency exchanges are:
- their vast reach
- insulation from global events
- freedom from large fees and regulation
- potential gains to be made given their volatility which provides incentive for continued interest and investment
If you’d like to know more, visit the Cointree Learning Hub for smart tips on choosing the right exchange or for time-tested trading and investment principles to get you started.
FAQs
Q: How does a cryptocurrency exchange work?
A: Each cryptocurrency exchange works differently, but essentially it’s an online marketplace where people can buy or sell cryptocurrency. Exchanges will have different fees and offer different cryptocurrencies. Bitcoin is the most popular cryptocurrency so will be found on most exchanges.
It’s important not to confuse a cryptocurrency exchange with a cryptocurrency wallet or a cryptocurrency broker.
Most exchanges will limit customers to only trading digital assets for digital assets, although a few do allow you to exchange cryptocurrencies to fiat currencies (eg. Australian dollars, US dollars)
At Cointree, there are over 240+ cryptocurrencies that you can trade in Australian Dollars (AUD).....click here to get started.
Q: Should I invest in cryptocurrency?
A: Unfortunately, Cointree is unable to provide investment advice on investing in cryptocurrency. You will need to take your own personal circ*mstances into account and make the best decision based on you situation.
Q: Why are cryptocurrency prices different on exchanges?
A: The price of bitcoin is different on all exchanges. This is because supply affects the price, so smaller exchanges may have it listed at a higher price due to low supply. Secondly, the price of bitcoin is based on trading because there’s no established way to price it, so no one knows what it’s ‘supposed’ to cost, rather it’s based on what people are willing to pay.
Q: How does cryptocurrency affect the stock market?
A: While cryptocurrency is independent of the stock market, some experts believe there is a strong correlation between the price of cryptocurrencies like bitcoin and the stock market. For some crypto enthusiasts, this may be upsetting because one of the reasons they love the crypto market is because of its self-sufficiency. However, there is some evidence that cryptocurrency does have wider impacts on the stock market. For example, Tesla’s share price rose 2% after the announcement that they would invest in bitcoin, but it has since fallen by 5%. Bloomberg has also noted that the correlation between bitcoin and the stock index remains positive, meaning that the movements of the price of bitcoin are consistent with those in equity markets.
Q: Does cryptocurrency have a future?
A: No one really knows what the future holds for cryptocurrency, but even sceptics cannot deny that it doesn’t seem to be going away anytime soon. Mastercard has even revealed plans to start supporting a select number of cryptocurrencies directly on its network in 2021. Perhaps one day crypto will be a common form of payment.
Q: Can you buy crypto on one exchange and sell on another?
A: Yes, this is known as arbitrage trading, but it’s not easy and it can sometimes even backfire. That’s because time delays and fees could mean missing out on an arbitrage opportunity. Transactions take time to verify to and from exchanges and verification steps may be required for large amounts of crypto. Weigh up the pros and cons before you consider arbitrage.
At Cointree, there are over 240+ cryptocurrencies that you can trade in Australian Dollars (AUD).....click here to get started.
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