What are the differences between crypto tokens and stocks?
Hint: They’re not the same. Stocks and crypto tokens often get confused for the other — but they’re vastly different…
Boomers: Don’t mistake tokens for stocks
Stock investors can vote on corporate matters or collect dividends — as stocks represent fractional ownership in a company.
Crypto tokens do not represent ownership — commonly categorized into three types of tokens:
- Utility — used inside a crypto project’s ecosystem i.e. as in-game currency and to pay fees (e.g. Ethereum and Solana).
- Transactional — used in exchange of goods and services (e.g. Dogecoin, Tether, USD Coin).
- Governance — allows holders to vote on the direction of the project (i.e. Maker, Aave and Uniswap).
Tokens can fall under multiple categories and how their prices move depends on understanding their differences…
Token + Economics = Tokenomics
Compared to stocks, tokens play an important part in a crypto project — particularly, utility tokens…
- Blockchains: Users pay transaction fees with the blockchain’s native crypto. i.e. Ethereum ($ETH) pays for gas (transaction) fees on the Ethereum blockchain.
- Crypto-gaming projects: Users often purchase the project’s token to interact with the game. i.e. Axie Infinity Shards ($AXS) is the in-game currency for the play-to-earn game, Axie Infinity.
In each case, token prices rise as more people engage with the project (demand and supply). When Axie Infinity exploded in popularity in 2021 — prices shot up following a jump in users and transaction volume on the game — followed by a crash.
Investors: Jacked up tech investing
Crypto is viewed and traded similarly to highly speculative tech investments — mostly unprofitable with high growth potential. Based on fundamental stock valuation methods — most crypto projects are overvalued.
Some survival tips for crypto investors:
- Understanding which crypto projects have staying power and will become an important piece of infrastructure or application in 5-10 years.
- Have a long investment time horizon and diversify — crypto is prone to wild swings with 50% plus corrections common.
Everything in crypto is still an experiment. As was the case with Axie — the game that popularized the play-to-earn concept — which reached nearly $10B in market cap at its peak.
Most projects can and will likely go to zero. That’s the nature of investing in the early stages of innovation.