Cryptocurrency has been making its entrance to the world of finance and is slowly gaining popularity for traders and investors alike. When initial coin offerings (ICOs) were at their height in 2017, many thought that the cryptocurrency market the same as the stock market, but with a different flavour. The stock market has IPOs, cryptocurrency has ICOs. The stock market as shares which have ticker symbols, cryptocurrency has ticker symbols for each project and associated token.
While there are similarities between the two markets, there are fundamental differences too. The moving and shaking of one market does not mean the other market is dancing too. Bitcoin price could be having a rollercoaster of a month but the stock market might be holding steady. The movement of the two markets is not the only thing that sets them apart from one another either.
The difference between the cryptocurrency and the stock market
The stock market has low volatility which makes daily, or intraday, trading slow. Because of this stock traders tend to hold their shares for a long time to accrue wealth over time as the shares gain value.
The cryptocurrency market, however, has very high volatility which is better for daily trading, as well as middle- and long-term holding strategies. Looking at Bitcoin over its ten years of existence, the price spikes and dips aggressively but gains overall long-term value.
In July 2010, Bitcoin shot up by 900% in just five days. From July 2011 to December 2011, the price saw a nearly 94% drop in price. Six years later, Bitcoin gained a whopping 1824% in value. The history of Bitcoin shows this constant swell and drop in price which makes trading finicky – but potentially exceptionally lucrative – business.
Project lifespan and regulation
A stock essentially represents a company, while a token represents the cryptocurrency project. In the stock market, there is a set of mandatory regulations a company must follow to be listed. This results in stocks from companies which tend to have a lengthy lifespan.
In cryptocurrency, ICOs are largely unregulated and require no business blueprint. Because of this absence of control, projects which have gained investment have failed and have ‘died’.
Two of the fundamental pillars of cryptocurrencies are that they are decentralised from a governing figure and that they are anonymous. This means that anything you own belongs entirely to you, especially with Bitcoin, and so you are entirely responsible to look after your assets and the private keys which give you access to them. This becomes difficult when hacking vulnerabilities are exploited.
In the stock market, if a company is hacked, the funds can be recovered and investors do not lose their assets with no hope at getting them back. In cryptocurrency, though, it’s much more unlikely that hacked funds can be recovered because of the anonymity and the decentralised nature.
Speculation, user base and revenue
Stocks are backed by real companies which generally have a constant user base bringing in revenue. This offers some degree of certainty as to the success of the company, as the value is in what the company can offer.
In cryptocurrency, speculation is one of the driving reasons for price changes. While there are certainly some cryptocurrency platforms which show value through real use-cases, others are simply still around because of positive sentiment. Dogecoin, for example, was created as a meme project but remains one of the leading cryptocurrencies because of sentiment alone.
Is it better to invest in Bitcoin?
Because of the great drive speculation and sentiment has on the cryptocurrency, Bitcoin stands as a popular alternative asset in which to invest. If long-term investment is your strategy, it’s recommended to buy Bitcoin when its value is in a dip and the hold on for dear life (commonly known as HODLing).
If you are a trader, then one of the more difficult things you might have to do is sell when the price is high. This takes willpower because it is appealing to wait to see if the value increases more. Ultimately, it could lose you profit if Bitcoin price drops. Professional traders tend to buy and sell incrementally.
If you choose to invest in cryptocurrency, one of the key pieces of advice is to put in money that you can afford to lose in case the market crashes.