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Will Crypto Replace Stocks? Understanding The Case Of Tokenized Company Shares

 

By Nerly Shammah May 27, 2023

 

The increased usage of cryptocurrencies begs the question "Will Crypto Replace Stocks?" The short answer is NO. However, cryptocurrencies will unlock incredibly flexible value structures for traditional investment assets.

 

 

 

What Is Cryptocurrency? 

 

A cryptocurrency is a digital asset whose transactions are recorded on an often public and distributed ledger called the blockchain and are secured with cryptographic algorithms and protocols including encryption technologies like SHA-256 and consensus mechanisms like proof of work(PoW) and proof of stake(PoS). 

 

The first ever widely successful cryptocurrency is Bitcoin, the most secured blockchain network and cryptocurrency based on public opinions on its protocols' design. 

 

What Are Stocks? 

 

Stocks are company shares sold to private or public investors as a representation of "partial ownership" of a company. The benefits of buying stocks include dividend payments which not all companies offer and speculated capital gains fueled by the development and expansion of the said companies. 

 

A stock is regulated unlike cryptocurrencies and is likewise less accessible to the general public. This is seen as crypto is tradable 24hrs a day while stocks have opening and closing market hours, however, this openness of the cryptocurrency markets makes it more volatile than the stock markets. That said, the infancy of cryptocurrency in comparison to stocks is incredibly wide given that stocks are over 411 years old compared to Bitcoin specifically being just 14 years old. 

 

The State Of Cryptocurrency Development

 

Due to the popularity of bitcoin and many crypto assets like utility tokens and NFTs, the world of finance and investment has taken major shifts and lots of attention has been drawn to these new forms of currencies and assets protected by cryptographic algorithms. One of the major events that have brought lots of attention to the cryptocurrency industry has been the move by the President of El Salvador to legalize Bitcoin by making it a legal tender in the country. This alone has gotten even the IMF talking and major media companies consistently publicizing claims of "financial ruin" of the country since, all of which have been ignored by President Nayib Bukele. 

 

Other notable events have been the venturing moves of influential billionaires like Elon Musk whose EV company, Tesla, currently holds over $184 million in Bitcoin as per the recent financial report. Likewise, Billion investor Michael Saylor of Microstrategy has likewise been buying thousands of bitcoin over the last 2 years. 

 

Effects of these actions have seen billions of dollars move in and out of the cryptocurrency markets including insane DeFi flows and NFT volumes. The industry has not been short of explosive value events in the last couple of years as such, major businesses ranging from regular coffee shops to real estate now accept crypto payments and others have leveraged the technology and its user base to raise development funds while some have adopted tokenization to pay back value to the community. 

 

All of this has got people thinking and asking questions, will bitcoin replace the dollar? Will stablecoins do it? Will stocks be replaced? Will DeFi kill the banking system? Well, here's what we at icoverage expect to happen.

 

The Future Of Cryptocurrencies and Stocks Are Tied

 

Cryptocurrencies will not replace stocks but help tokenize them for more flexibility. One of the core merits of crypto assets is that they are highly flexible because fundamentally, they lack "central structures" that would otherwise make the system rigid. The peer-to-peer nature of cryptocurrency transactions makes them one of the most highly flexible and scalable asset classes. This is the reason cryptocurrencies are considered global assets as though they can be accessed from anywhere in the world, no GEO limitations can stop a Bitcoin transaction from being received by an address whose owner is in China, the blockchain frankly doesn't care about that because, for starters, the network nodes(decentralized alternatives to centralized servers) are distributed across numerous locations of which many are private institutions that nobody knows of, so a typical transaction has no limitation as the system is always up to process them. 

 

That said, what is tokenization and does it bridge the world of cryptocurrencies and stocks? 

 

You see, one thing is certain when it comes to business and finance, and that is the fact that "centralized" systems will always exist, so it is increasingly difficult to believe that something as centrally managed as "stocks" will be replaced by cryptocurrencies which are fundamentally designed to give away central influence. So crypto thus cannot replace stocks, but with the aid of "tokenization" stocks can exist within the cryptocurrency markets and ecosystem and thus enable these central markets to tap into more value for growth. 

 

Tokenization is typically the replacement of sensitive data with non-sensitive one. In blockchain technology, the process of tokenization involves creating a fungible or nonfungible representation of a secondary item(physical or digital asset) on the blockchain.

 

That means that a company such as Tesla could decide to launch a crypto token called "ETesla" for example on the Ethereum network. Each ETesla in circulation would effectively represent all the stocks that have been committed to the smart contract that powers the token. So if for example, 10 investors have decided to lock up 10 million Tesla shares in the smart contract, in return receive ETesla which has the same value as the Tesla company stock as though it is directly backed by it. With ETesla, they may be able to do many things in the cryptocurrency markets like maybe using it as collateral for loans from platforms that would accept it, or join liquidity pools to earn yield on their investments while not having to sell their Tesla stock to do so. 

 

At the time of writing, big institutions like JPMorgan are already building a blockchain protocol for the tokenization of traditional assets, this is a clear indication of where things are moving. Crypto will exist, and stocks will exist, I mean, even fiat currencies may still exist and with the power of tokenization, all the asset classes in the world can be leveraged in the open and global markets. This is potentially what the future of assets will look like.