Cryptocurrency exchanges v stock exchanges. Are they anything alike?

Trade has a history as long as history itself, however stock exchanges as we know them are a relatively new phenomenon.

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 share much in common -- the key factor being that they facilitate trade. However the two also have some stark differences.

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).

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.

The purchase of cryptocurrency -- be it coins or tokens -- does not necessarily represent partial ownership of the company that issued it. Ownership is dependent on the cryptocurrency being traded.

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 exchanges also receive government backing.

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 of smaller investors.

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 sits outside of 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 rouses 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 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 currently experience great volatility. The market is new, meaning that its highs and lows are very pronounced. A far smaller marketplace, cryptocurrency exchanges are also vulnerable to the trade movements of 'whale' traders. This means that the whole market can be vulnerable to the trade decisions of those heavily invested.

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, starting trading can be a time and energy intensive process.

You'll need to find yourself a broker and -- once you've sorted that detail, 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 markets reach far and wide. Anyone can trade in cryptocurrencies whenever they please. Getting started is a relatively straightforward process and cryptocurrency exchanges stay open 24/7, allowing 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. Gains are taxed.

Trading on cryptocurrency exchanges incurs relatively fewer costs. The costs associated with transacting on the blockchain are miniscule, consisting only of any mining fees. Exchanges themselves thus incur lower costs when buying and selling cryptocurrencies than do 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 cryptocurrency marketplace.

Cryptocurrency exchanges: looking to new horizons

Although cryptocurrency exchanges share similarities with traditional stock exchanges, there are also vast differences.

For many crypto traders and investors, the hallmarks of cryptocurrency exchanges -- their vast reach, insulation from global events, freedom from fees and regulation, and the potential gains to be made given their volatility, provide incentive for continued interest and investment.

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.


Credit: Laura Hawting on behalf of Cointree and reviewed by Anouk Pinchetti education consultant Blockchain Centre.