Sometimes it’s just easier to compare crypto to stocks when explaining them to an inexperienced investor, due to the general familiarity with the stock market. It is often thought that cryptocurrencies are like shares -- not so fast. They are similar in that they rise and fall in value like stocks, but the ownership aspect is what truly separates the two. It is thought that when we buy stocks, we own a piece of the company. That is not entirely true. Instead, you own the rights to selling a representation of the company, which is the stock. The stock itself has no true value. The company has value and the company owns assets. Purchasing a stock doesn’t give you rights to the company's assets, but it does offer rights to future profits by way of stock value increase.
As mentioned before, you own something that represents the company. In some cases, companies have done well financially, yet their stock decreased in value. On the other hand, there are instances like the infamous Game Stop phenomenon: the company was dying, however shareholders were able to send a volume attack on the stock to raise the price to levels near its all-time high. How can a dying company have a positive stock price? The stock can actually act independently of the company as long as buyers and sellers in the market have a positive or negative sentiment. This is basically a form of speculation.
According to Investopedia:
“In the world of finance, speculation, or speculative trading, refers to the act of conducting a financial transaction that has substantial risk of losing value, but also holds the expectation of a significant gain or other major value.”
GameStop was deemed a speculative trade. Crypto is also deemed speculative as well. We will discuss that in a separate post.
So if crypto isn’t like a stock, then what is it? Is it a currency? Yes, because it acts as a medium of exchange. Crypto also acts as a commodity, such as gold, oil, and other precious metals. Cryptocurrencies are designed to be decentralized so, like commodities, they don’t produce a return from a common enterprise.
What we are witnessing is the rise of a new asset class -- a hybrid, if you will. Crypto is a combination of different asset classes because of its characteristics. Although companies can create products on the blockchain, that doesn’t mean we (the general public) can’t own them.
In a nutshell, crypto is still blooming and very speculative. The true value will eventually settle in and that’s when we will see more steady growth, versus violent up and down swings. All emerging industries go through a period of volatility before settling. The best thing we can do is make sure we have invested enough during the downward swings so that we can enjoy the markets when they are calmer in the future.
Author: Eric White
Editor: Shamya White