Cryptomarkets are getting more and more popular. Although cryptocurrencies have their ups and downs, their market cap is rising. Even big investment companies started introducing funds that include Bitcoin and Ethereum. Most beginners don’t know the difference between a cryptomarket and traditional stock exchange – which is a big mistake. Before you put aside some money to invest in cryptocurrencies on the market, remember that investing in tokens is different from investing in stock.
The greatest differences between shares and cryptocurrencies can be seen in the way their price is determined. Shares are distributed by companies that are supposed to earn money. They include physical assets as a part of their assessment and it is possible to mathematically check if their shares are appropriately priced in comparison to their market value. On the other hand, cryptocurrencies aren’t always supported by companies. They are mostly appraised based on the movement they generate, although some also raise their prices because of their functionality. Considering it’s a very subjective assessment, it’s not always easy to see if the cryptocurrency is worth it.
Shares and cryptocurrency – asset characterisation
Everyone can create a cryptocurrency, and their supplies have to be published by special groups. One of the reasons that crypto is known as “the rebellious technology” is the fact that everyone can create their own blockchain ledger. Many digital currencies, like the Dogecoin were actually created by groups of bored programmers.
As everyone can open a blockchain token, it’s easy to set up your own ICO. You can’t say the same about shares – especially the ones listed on NYSE, NASDAQ or the Warsaw Stock Exchange.
When stocks are created, they have to be verified by government agencies and audited. Traditional market were created for a very simple purpose: to gain funds for companies that need money. Cryptocurrencies function differently, as one currency can have more than one purpose. Some crypto tokens can be used as a blockchain base for games and programming. Others are a store of value, and even more of them can be used on certain pages. Before you decide to invest in a cryptocurrency, check what is it used for. Cryptocurrencies are mostly priced based on their reputation. This creates quite an unstable market with extreme highs and lows. In the case of investment behaviour, it leads to one of the most extreme differences between cryptocurrency and traditional markets. Stock investors usually hold their assets during unstable times, knowing that it will eventually stabilize. As cryptocurrencies are more prone to fluctuations, selling during panic on the market is very common, and almost desirable when it comes to cryptomarkets.
Another difference comes from the different investor profiles. As investing in stocks is de facto a way for people to prepare for retirement, they attract people from various backgrounds. You can see hydraulics, teachers and even teenagers with pockets full of assets. But cryptocurrencies are still a very niche investment. Most cryptocurrency owners are 20-30 year-old males with higher education.
Are cryptocurrencies safe?
It’s possible for shares to be more safe from scams than cryptocurrencies. Traditional market is strictly regulated and has to go through yearly audits. Additionally, due to the strict regulations that surround creating new assets, it’s highly unlikely for the stock you invest in to be false. On the other hand, cryptocurrencies are more prone to scams due to their unregulated, decentralized nature. Speaking of scams, there is another matter that points to serious differences between cryptocurrencies and other assets. When you buy stock, it is registered to your name, there’s proof that it belongs to you. People can’t really steal stock because of all the tracking and registering transactions.
Cryptocurrencies are different. It’s literally a digital currency – and it can be hacked. There were many cases of successful crypto investors doing everything right, amassing millions of dollars just to wind up penniless because of a hacker.
Considering all the problems that come with cryptocurrencies you’d think people avoid it like the plague. If their returns were regular then you would probably be right. But cryptocurrencies don’t always have a “regular” returns, like stock does. Many long-term investors declared returns of over 1000%. Even short term ICO investments usually return about 150%. Compared to the traditional stock, it’s a lot.
To trade in the stock market you can use some of the investment applications to initiate a transaction. It’s simple and easy to accomplish. Learning how to trade cryptocurrencies, although more popular than it used to be, is way more complicated.
To complete most transactions that don’t include Bitcoin or Ethereum, you have to download a cryptowallet, exchange money for Ethereum or Bitcoin, and then buy the coins using these tokens. If you want to withdraw money you also have to make quite a few transactions.
Finally, there is an even greater uncertainty concerning the future of cryptocurrencies. The differences between cryptocurrency and stock are great, but one of the most obvious ones is the fact, that stock exchange became an institution, which dictates the functioning of entire economies. Cryptocurrencies aren’t that institutionalized.
Will cryptomarket become the new stock exchange? Can cryptomarket even get back their data, considering the latest events? Views on the topic vary from investor to investor and experts can’t give a definite answer.
The need to exist
At the moment there’s not much correlation between stock and cryptocurrencies. The reason for this minimal connection is the many differences between crypto and the traditional market. The whole cryptocurrency infrastructure that currently exists relies only on itself. The price of Bitcoin theoretically wasn’t tied to any economic indicators of the real sectors. Cryptocurrencies are a completely closed-off, separate market. The only similarity between this and the traditional market is the rule of supply and demand and all of its derivatives. This is the reason stock market wasn’t too eager to include cryptocurrencies in their assets.
But what would happen if they did? The rise of cryptocurrency transaction volume attracts institutional investors to the cryptocurrency market. That could lead to the stabilization of prices and less variability caused by crypto assets being amassed on e-wallets of big market players. Attracting new players to the market with new trading tools would definitely improve the visibility of the exchanges.
Moreover – a few big exchanges already tried to introduce products based on cryptocurrencies, although to a limited extent. Intercontinental Stock Exchange (ICE) started up a cryptocurrency channel in January of 2018 to share basic information about the digital currency. ICE also raised the number of supported cryptocurrencies from various data sources and markets all over the world. In February, on the other hand, ICE announced the launch of their own cryptocurrency platform, which already attracted a few known investors, like Microsoft and Starbucks.