Cryptocurrency Explained: Key Differences Compared to Stocks

Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

‍

CRYPTOCURRENCY EXPLAINED: A QUICK OVERVIEW

• Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.
• Decentralized structure (without the backing of a central bank or government) allows them to exist outside the control of governments and central authorities. 
• Experts believe that blockchain and related technology will disrupt many industries, including finance and law. 
• The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. 
• The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.

Types of Cryptocurrency

 Different types of cryptocurrencies can be classified into the following two groups:

Coins are designed to be used as a kind of currency and are created on their own blockchain. Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. The maximum supply of Bitcoin is capped at 21 million, as determined by the Bitcoin's creator(s).

Tokens are built on an existing blockchain but are considered to be programmable assets that enable the formulation and execution of unique smart contracts. Outside of the blockchain network, these contracts can be used to establish ownership of assets. Tokens can be used to represent units of value such as money, coins, digital assets and electricity, and can also be sent and received. 

Stablecoins peg their values to various fiat currencies or assets, such as xbullion digital gold and Australia dollar backed XAUD. Most often pegged one-to-one with the U.S. dollar, stablecoins give users a way to sell into an asset carrying the same value as a national currency, but one that can still be transacted and stored in a crypto-esque fashion within the ecosystem. Explore more about stablecoin and its integration.

Non fungible tokens (NFT) are yet another type of cryptocurrency, denoting that it is a one-of-a-kind asset and cannot be replaced. A Bitcoin, for example, is fungible, that can exchange one for another and get precisely the identical thing. However, a one-of-a-kind trade card, on the other hand, cannot be duplicated.

Why are Cryptocurrencies so Volatile? 

There is a lot of volatility in the cryptocurrency space due to the industry’s newness. Investors are seeking to experiment with their money to generate riches quickly and figure out how cryptocurrency prices vary and whether they can affect them. The number of people who utilize crypto coins and for what purpose impacts their price. The price will rise if more people use them to buy goods and services rather than just holding them. 

The value of cryptocurrency is also driven by scarcity. This alludes to the cryptocurrency’s finite mechanism. The Bitcoin protocol sets the maximum amount of BTC that can be mined at 21 million. Therefore, as more people enter the crypto space, Bitcoin’s scarcity will inevitably increase, causing its price to increase. Many believe Bitcoin is digital gold as it shares deep historical antecedent of being a store of value and wealth. But over time, a market correlation between gold and Bitcoin started becoming inevitable and apparent. In simpler words, a connection developed between these two assets—gold and Bitcoin—such that when gold price rises, Bitcoin’s come down; and vice versa. 

Some coins also use the burning mechanism to increase their value by destroying a portion of the supply. Accounts that hold vast amounts of a cryptocurrency may begin to sell, causing prices to plummet. These accounts are known as whales because they have a significant position and can influence the market if a group of people agrees to sell crypto assets. 

Cryptocurrency vs. Stocks

Investing in stocks is the established choice and crypto is a novel form of investment.

It’s a fierce debate among investors. Stocks have been around for centuries and have achieved a certain status of reliability, while cryptocurrencies have only come into inception in recent years. For seasoned investors, it’s not so much about which one is better but which form of investing aligns with their goals. 

Stocks are backed by company assets or physical money, however, this is not the case with crypto. The crypto market is young and growing rapidly which means there is great volatility.

Crypto Trading vs. Stock Trading

Both the crypto and the stock markets are volatile and subject to external influences. 

Cryptocurrency can be bought at a cryptocurrency exchange trading 24/7 while stock exchanges have a limited opening hours. Normally, the crypto market is more volatile than the stock market. However, the stock market is also subject to volatility due to interest rate changes and uncertain situations like war, inflation rate and monetary policy changes. Whenever there are uncertainties and inflationary instability in the financial markets, gold has always been a safe store of value. Over time, this has been made possible through its risk aversion and shock-resistant qualities.

What about trading costs in cryptocurrency vs. stocks? Basically, transaction fees do not apply to the crypto market, as it is decentralized. However, there is a gas fee to reward the miners and validators who secure transactions on the network. On the stock market, transaction costs like brokerage fee apply, certain platforms like eToro that do not charge any commission for trading stocks. 

Crypto Investment vs. Stock Investment

Investing in stocks works differently than committing funds to cryptocurrencies. 

When investing in stocks, investors become a certain part owner of a company called a shareholder. Dividends may be kept as cash or reinvested in order to accumulate more shares by investors who receive them. The stock market is incredibly strict in terms of laws and regulations, with all the associated penalties for non-compliance. 

The crypto market does not have to deal with international laws and regulations and the market is in motion 24/7. Direct ownership of coins or tokens are equal to owning shares. With the recent global issues, digital coins fall outside the control of a central bank, allowing investors to complete anonymous transactions at lightning speed and bypassing economic trends such as inflation.

What is the Future of Cryptocurrency? 

Cryptocurrency has come a long way over the last decade, advancing at a lightspeed pace. Value can be stored, transferred and spent in different ways through various assets and solutions, while DeFi has pioneered the way for new borrowing and lending avenues. xbullion is a global network for the settlement of physical gold and silver bullion, integrated with Chainlink and Pyth price feed oracles secured trusted precious metal pricing, bringing transparency, efficiency and accessibility for users to access the largest bullion marketplaces in the world.

Some mainstream companies also view blockchain technology itself with interest, evaluating various uses such as supply chain. The future of cryptocurrency and its associated technology appears bright, judging by the growth and adoption that has been seen since 2008 when Nakamoto published the framework for a little asset called Bitcoin. 

To learn more about the cryptocurrency, make sure to join xbullion on Twitter, Discord, Facebook, Linkedin.

‍