The differences between trading cryptocurrencies and stocks
When considering investment opportunities, as well as portfolio diversification techniques and strategies, many investors have a tendency to stick to what they’re familiar with. That includes traditional and alternative investments, such as stocks, bonds, shares, gold and so on. However, with the introduction of cryptocurrencies back in 2009, when Bitcoin entered the market, investors can now opt for digital assets as a part of their diversified portfolio strategy as well. It’s no secret that investors are showing interest in the cryptocurrency market.
But, the extremely high volatility of an unregulated crypto market still makes this a high-risk investment. That’s why experience investors are more likely to opt for shares, stocks and bonds. However, many new investors oftentimes believe that cryptocurrencies and shares are the same thing. Unfortunately, that statement can’t be further from the truth. New investors that want to enter the cryptocurrency market have some knowledge of share trade. But, the rules that apply for share trade aren’t always applicable to cryptocurrency trade. That being said, here are the differences between shares and cryptocurrencies.
As mentioned before, cryptocurrencies entered the market when Bitcoin was introduced back in 2009. The blockchain technology behind Bitcoin and a decentralized public ledger unregulated by any banks or governments, created a lot of buzz surrounding it. After Bitcoin, over a thousand more cryptocurrencies have flooded the market, each showing or promising unique advantages. The popularity of Bitcoin inflated its price, but the volatility of the market prevents its price from stabilizing for a longer time period.
In essence, the value of cryptocurrency comes down to how much someone is willing to buy or sell it for. That being said, many investors jumped an opportunity to earn quick ROI on crypto tokens. However, some coins that once show promise then drop in price drastically, leaving investors without any profits or even loses.
For instance, Bitcoin itself raised in price to an all-time maximum in December 2017, reaching $17,900, only to drop down to $6,200 two months later. The crypto market is unregulated and investing in cryptocurrencies yields no security, insurance or stability. What’s more, most cryptocurrencies aren’t backed by any business models, projected revenue or any other assets. That’s why investing in cryptocurrencies is such a high-risk scenario for investors.
Trading in shares
The stock market has been present far longer than cryptocurrencies. That’s why investors are more comfortable with the stock market. The stock market is highly regulated, offering security, stability and insurance for both investors and their investments. What’s more, there are many factors that influence the value of company shares.
For instance, a company’s shares value is estimated by its capitalization, business model, P/E (Price to Earnings) ratio, revenue, cash flow and so on. By forecasting a company’s performance, investors can decide whether to invest more or back out of their investment. For cryptocurrencies, there’s no sure way to tell whether their price will go up or down, nor when or why because there’s oftentimes nothing to base forecasts on.
Furthermore, investors have an opportunity to choose which companies to invest in, i.e. which shares to buy. For example, investors can opt for small cap stocks, mid cap stocks and large cap stocks. Moreover, if an investor is interested in small companies and their performance, they’ll focus on small cap stocks. In essence, they monitor the performance of companies that have a market capitalization between $300 million and $2 billion. In other words, investors can choose between company sizes, their performance on the market, as well as their capitalization and number of shares available to make their investment.
What’s the difference?
The main difference between shares and cryptocurrencies is in the regulation of the market itself. Although lack of regulation and supervision in the cryptocurrency market seams as an advantage to many, it opens room for numerous risk for the investors themselves. The stock market is regulated and provides certain securities to investors.
For example, if you’re under U.S. brokerage, your investments are insured to up to $500,000 by FDIC (Federal Deposit Insurance Corporation) and SIPC (Securities Investor Protection Corporation), in case your brokerage goes out of business. Also, share trading can be a long-term investment, where investors can choose to sell shares when prices go up or collect dividends from their share of the company. Cryptocurrencies don’t offer such commodities and they pose greater risks for investors. For instance:
- High market volatility – the prices of cryptocurrencies are highly volatile, which means they can either skyrocket or even go down to zero.
- No real assets – Shares are backed by companies that generate revenue. Whereas, most cryptocurrencies are basically created out of nothing. With no assets, revenue streams or business models to guarantee their price, many cryptocurrencies and their tokens are valued based on a company’s promise. And, with no regulations on the market, there’s nothing to hold a company accountable for not fulfilling its promise.
- Greater risk of losing investments – Cryptocurrencies are digital assets, which means they have no physical value like gold, which can be used as a material in various industries. Blockchain (which is the technology behind most cryptocurrencies these days) transactions are permanent. That means that if someone stole your private keys to your digital assets, they could take your investment away through an irreversible transaction.
Until cryptocurrency market stabilizes and ensures some security for investors, it will be considered high risk. During that time, investors will most likely stick to what they know and engage further with the stock exchange.
Many investors have made their careers in trading in stocks, bonds and shares. The market is old and familiar to them. However, cryptocurrency market is still fresh, but it’s showing promise and a great potential for future investments. How cryptocurrencies will perform in the future remains to be seen.
Sign in or become a BestTechie member to join the conversation.
Just enter your email below to get a log in link.