The boom in the stock markets and the hype about cryptocurrencies like Bitcoin and Co. has created a new financial product: crypto stocks. But what is behind the new investment, also known as stock tokens? A little analysis.
What are crypto stocks or stock tokens?
Even answering the question about the definition of crypto shares or stock tokens is not easy. First of all, a crypto share is not a real share, but a replica of such a share through algorithms and computers.
Stock tokens thus combine the world of stocks with the world of cryptocurrencies. In order to offer the crypto shares, a special purpose vehicle or company buys real shares and then tokenize them. This in turn enables investors to participate in the share price development.
How do crypto stocks work in practice?
This can be explained in a relatively understandable way using the largest crypto exchange in the world – Binance. It introduced stock tokens in spring 2021. That means: Binance users can not only buy cryptocurrencies, but also crypto stocks.
For this, Binance then buys real shares and stores them in a depot of the investment specialists from CM-Equity and the token platform Digital Assets. Incidentally, this is exactly what the German fintech Vivid Money does.
You can currently buy stock tokens from Apple, Coinbase, Microsoft, Micro Strategy Incorporated and Tesla at Binance.
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What are the advantages of crypto stocks and stock tokens?
1. Low financial entry barriers
The greatest advantage of the new form of investment is likely to be that investors can participate in the price development of companies through crypto shares without owning a complete share themselves.
With the stock tokens, it is possible to buy only fractions. For Tesla shares on Binance, the minimum investment is one hundredth. That means: With a current share price of just over 600 euros, the entry amount is just six euros.
Stock tokens are therefore very attractive, especially for expensive stocks that cost high three-digit or even four or five-digit amounts.
2. No deposit required
The second advantage is that investors do not have to open a custody account with a traditional bank. An official identification document is usually sufficient for logging in and registering with crypto exchanges.
This is a strong argument in favor of crypto stocks, especially in countries with an unstable or chaotic financial system. In addition, the stock tokens are in a certain way secured at least to a certain extent by being linked to real existing values.
Because stock tokens replicate a real share, it is also possible to easily transfer the purchased shares from one country to another or from one account to another. With traditional stocks, this is often problematic, especially in international transactions.
3. No fixed trading hours
And the third advantage of crypto stocks is that they are not tied to specific trading and opening times of exchanges due to the tokenization and transfer to the blockchain.
If you want to buy shares in Tesla shares, you can do so at 3 p.m. in the afternoon as well as at 2.30 a.m. There are also no restrictions on trading on weekends or holidays.
What are the disadvantages of crypto stocks for investors?
At first glance, it seems as if stock tokens only bring advantages. But that’s not the case. In many cases, it is difficult or impossible for investors to understand whether a real share has actually been bought for the digitally replicated share.
Nor are young and inexperienced users aware that they are not buying real shares from Binance, Vivid and Co. You explicitly do not participate directly in companies through the crypto shares. Only the investment firms that buy, own, and manage the real stocks do that.
It is therefore not surprising that international authorities and regulatory bodies such as the Bafin (Federal Financial Supervisory Authority) in Germany have long been focusing on the new financial investment.
After all, the crypto stocks are largely unregulated. This lack of regulation also gives rise to some of the benefits. This applies, for example, to the international transfer of stock tokens. And there are still some unanswered questions with regard to tax law.