Most of them, however, have some form of knowledge of the stock market. Using trading lessons learned from the stock market and applying them on the cryptocurrency market is not necessarily a smart move though.
This post will outline a few differences and similarities between shares traded on the stock market and cryptocurrencies and their respective trading environments, and hopefully give you an overview over what to think about when comparing the two.
First of all, an unescapable similarity between shares and cryptocurrencies is that the value is what another person is prepared to purchase the share/coin for. If the stock or crypto price is USD 10, and a seller suddenly wants to sell for USD 100, then the value is USD 100 as soon as such seller finds a buyer. So, in a sense, the only thing that really matters is what other buyers or sellers in the market are willing to buy/sell for. Less so with cryptocurrencies, there are several different ways to value shares. The most commonly used valuation methods are the following.
P/E Ratio: Market Value per Shares / Earnings per Share. By performing that division, you will arrive at a PE-number. If the PE-number is 20, it means an investor is willing to pay 20 times the earnings per share to acquire one share. In order to know whether a company’s PE-number indicates that you should buy or sell the share, you must also know the PE-number for comparable companies in the same industry.
Net Asset Value per Share: Net Asset Value or NAV is essentially the accounting value of a firm, calculated by adding up its assets and then subtracting liabilities and intangible assets such as goodwill or brand value. Effectively, it is what shareholders would own if the company were wound up and its creditors repaid. If a company’s share price is less than its Net Asset Value per Share, it could be an interesting acquisition as you are effectively getting the assets for less than their accounting value.
Discounted Cash Flow: The DCF-valuation model is a bit more complex. What you do when assessing the share price with the DCF-model is to – based on profit forecasts etc. – total the expected returns at a time in the future, and then discount them back to a per-share value in today’s money that can be compared to the share price. If the discounted value is lower than today’s share price, then the share is attractively priced.
What about determining the value of crypto?
All of the above valuation models are based on the financial statements and forecasts of the Company. Companies issuing cryptocurrencies are not required to publish any such statements or forecasts, but it also doesn’t really matter.
Unlike stocks, owning crypto doesn’t give you special rights or any claim to ownership of the issuing company.
The value of cryptocurrency, is determined on the basis of its utility. For Ethereum one could study how much the Ethereum platform is being utilized by developers and how many transactions of ETH are conducted; for DASH, one could see how much it is actually used as a medium of exchange.
Ownership and Voting Rights
A big difference between shares and cryptocurrencies on a conceptual level is that crypto gives you no ownership interests or voting rights in the underlying entity.
An additional difference between shares and cryptocurrencies is the access to dividends. Successful companies often give its shareholders a yearly dividend amounting to a few percentage points of the share price each year. The size of the dividend is proposed by the board of directors of the company and resolved upon by the company’s general meeting of shareholders.
However, over the past year, with the rise of native exchange tokens, there have been some developments in this regard, with some exchanges sharing revenue on the basis of user’s holdings of their native exchange token.
Another difference between shares and cryptocurrencies is that shares are heavily regulated. There are numerous rules and regulations regarding what companies in the stock market must and must not do and what the investors in the stock market must not do. The most important of these regulations are probably the rules on insider trading and the rules on periodic publications of financial statements.
The rules on insider trading prohibit people in the market from trading based on price-sensitive information (being information that has the potential of influencing a particular company’s share price). Accordingly, as an investor, you cannot take advantage of other investors not having the price-sensitive information you have.
Lack of market integrity and regulatory oversight have posed problems for the crypto industry. But this is changing fast. Especially with the announcement of Facebook’s Libra, a lot of guidance has been released from regulators as well as other industry participants, including the Financial Action Task Force, the International Monetary Funds, but also several Central Banks and the Financial Conduct Authority.
Equally important has been that a new generation of crypto exchange has been on the rise which place performance, integrity and security at the heart of the operations.
The stock markets close. The exchanges where you can trade financial instruments are not open during the weekend and normally close in the afternoon, around 5 p.m. (the exact time dependent upon in which country the relevant exchange is based). If you want to be on top of your holdings and never miss a beat, you can comfortably sit back in your sofa when the stock markets close and look back on a (hopefully) successful day. This is very different in the crypto world. The cryptocurrency exchanges are open 24/7 for the whole year (including Christmas). The markets are always active and the blockchain never sleeps.
Another difference between shares and cryptocurrencies is the fees for trading. In the crypto world the main fees to be concerned about are the “maker/taker fees” and the withdrawal fees, whereas in the share world you first and foremost have the brokerage fees.
The maker and taker fees that are the common versions of trading fees can be analysed in more detail than what is done here. To summarize, a trade gets the taker fee if the trade order is matched immediately against an order already on the order book. This order removes liquidity from the order book. A trade gets the maker fee if the trade order is not matched immediately against an order already on the order book. This order adds liquidity to the order book. When a fee is flat it is equally high or low irrespective of whether you are a taker or a maker.
When trading on the stock market there are no taker or maker fees, both parties are charged brokerage fees. The brokerage fees are normally dependent upon from which account you are trading.
Today, an “industry standard” is that the taker fees are in the interval of 0.20% – 0.25%. Brokerage fees, however, vary from country to country but a global industry average is far below the abovementioned interval. On the flip side, some crypto exchanges offer 0-fee trading and a few exceptions (such as AAX) even offer negative trading fees, usually maker fees, meaning that you can get paid to trade. To Cryptowisser’s knowledge there are no such brokerage fees arrangements in the world of share trading.
A final difference between shares and cryptocurrencies to highlight is that many cryptocurrency exchanges charge withdrawal fees when a trader wants to take home his/her profits. This is uncommon when share trading.
The conclusion to be drawn based on the above analysis is easy: an investment in cryptocurrencies is riskier than an investment in shares. The price of a share is more correctly set by the market (as the company releases financial statements periodically that are the basis for different valuation models to apply). But, on the flip side, an investment in cryptocurrencies and Bitcoin provides less “obstacles” to be concerned with and the potential for generating extreme profits is much bigger in the crypto world (mostly due to the volatility in the crypto world).
Just as with any investment practice, our recommendation is to do your research before starting to trade in crypto. We hope that this has helped you learn more about the difference between shares and cryptocurrencies.
Trade with AAX
AAX is the world’s first digital asset exchange to be powered by LSEG Technology. Offering OTC, spot, and futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; and a meeting point between crypto and global finance.
Open an account with AAX, or download the app, and experience the next generation crypto exchange.