Cryptocurrency VS Stock Market!
Investing in cryptocurrencies has become increasingly popular over the years. More people are adding cryptocurrency investments to their existing portfolios of equity investments, while some are even choosing cryptocurrencies instead of the traditional stock market.
There are some important differences between the two investment styles to keep in mind.
The cryptocurrency market is known for its volatility and speculative nature which is what attracts so many people to this market. Investors that time it right can have extraordinary returns. However, with superior potential returns also comes more risk. Besides overall price volatility, there are some other major risk factors as well.
Most of the projects in the cryptocurrency market are extremely young as the market has not been around for that long. It was not until 2017 that the ICO market really gained popularity, dramatically increasing the number of projects around. Most of the cryptocurrencies are utility tokens, meaning that they derive their value from the use of the token within a particular ecosystem. So, an investment in these tokens means that you believe that a significant amount of people will use the token in the future, resulting in higher demand than supply.
Statistics show that most start-ups fail, which is no different in this market. When that happens, the cryptocurrency associated with the project has no value anymore, thus eliminating your investment.
Regardless of whether the underlying project is performing well, the price of individual cryptocurrencies is heavily influenced by the overall sentiment. Whenever Bitcoin is in a bear market or suddenly dumping, other cryptocurrencies more often than not follow suit. This can be a huge plus for your investment in case of bullish sentiment but can be detrimental for your investments when the sentiment is bearish, even when your investment is fundamentally solid.
Another big risk in this market is the threat of scams. Many projects have used this new market and the high expectations of retail investors to fill their own pockets with relative ease and “near zero” consequence.
There are not many derivative products in this young market. However, slowly we are seeing that more possibilities are becoming available to investors such as options and futures trading. We are already seeing some strong growth in these areas, which is expected to continue as the market matures further.
Overall, the stock market is seen as less volatile and risky compared to the cryptocurrency market. This is for the following reasons:
There are a lot more participants and capital in this market, resulting in more overall liquidity.
Owning stocks makes you an owner in actual real companies that mostly have existing revenue streams instead of a token that simply derives its value from (expected) use. This makes it easier to estimate the fair value of the stock.
While the stock market is definitely not 100% “fraud-free”, it is a much safer environment for investors than the cryptocurrency market. There are securities and exchange commissions such as the SEC in the US which have clear rules to make the market as transparent as safe as possible for investors.
There is a wide range of derivative products available on the stock market that are traded at large volumes, such as options, futures, sprinters, etc.
All of this results in a higher level of market efficiency in the stock market, limiting price fluctuations and thus risk when compared to cryptocurrencies. However, this also means less upside to your investment.
Know what you buy
Both markets can be lucrative. How you should invest your money depends on what your risk appetite is as well as what your goals are in investing.
Keep in mind that these are the overall comparisons between the cryptocurrency and stock market. Especially within the stock market the risks per company can vary widely based on industry, size, liquidity, country, etc.