In the last few years, the cryptocurrency industry has managed to record tremendous success across its markets, thanks to the emergence of bitcoin and other vast range of altcoins.
This has forced investors to conduct heated debates on dealing in the cryptocurrency markets. Though these two markets have significant similarities; there are still entirely different in approach and management.
Many would argue that investors who intend to invest in the crypto market may not need any stock market trading background, however, having the fundamental values of the traditional stock market will give you an edge.
The stock exchange has been a substantial mode of investment, while bitcoin and other altcoins are viewed as digital currency only. Even though bitcoin and other altcoins are considered digital currency, their application is not limited to just that. Despite its volatility, bitcoin has proved to be a viable alternative asset class for many individuals.
Differences and similarities: investing in the crypto market and stock market
The crypto market still involves purchasing and trading of a commodity of value, just like in the traditional stock markets and money markets. In both scenarios, a purchase is made in the hope that the value will increase and result in a profit.
Profit and loss margins
The gap between the profit-making margins in crypto markets and stock markets is one of the most significant differences. Investment in the stock market involves patience since producing a substantial amount of profit is a slow process and in many instances could even take years.
But, with crypto markets, this is different, because of the volatile nature of the bitcoin and other altcoins, a massive swing in the value of assets can result in almost instant profits or loses.
Take the value of bitcoin late last year for instance; investors who had invested earlier that year had quadrupled their profits in a three months period. This is almost unheard of in traditional markets. However, almost instantly, the value of bitcoin dropped by half, leading to many who joined at the end of the year having significant losses.
With bitcoin being at the front line, the cryptocurrency is globally accepted whereby 180 countries are accepting bitcoin as a mode of transaction. Transferring assets with cryptocurrencies is easy and the reason why digital currencies are actively being accepted globally. The blockchain technology also attracts less transaction fee.
When it comes to the stock markets, you need to produce formal accreditation. Note that these credentials are generally restricted to qualified institutional buyers allowing only the ones with large sums of money to invest.
Due to such legalities and paperwork, many stocks are generally traded in the country where they originate. Sure, in some cases foreign investors may come in, but this takes a lot of marketing and capital. Usually, only large local stocks get foreign investors.
Can you still invest in international stock?
Yes, you can purchase stocks that are listed on any stock market from any country, But you must do that transaction through a broker.
With broker companies though, the underlined contract has many rules and regulations. Many don't work with several countries because the company chooses not to or because they don't have a legitimate way to transact money with the country.
With KYC (know your customer) management almost banning some countries, the stock market is still somewhat limited to the local or a generically localized market.
Another massive problem with the stock market is that it operates from 9:30 a.m. to 4 p.m. Monday through Friday and, therefore, any event or news around the globe that occurs outside this time frame affects the stock the following day when the market is open.
Investors don't have the option to sell or purchase fast enough outside the operating hours of their corresponding stock exchange.
This, however, can give investors some control over the markets. It's one of the oldest tricks to use time and timezones to predict the market. There are three major markets in the world at the moment, Asia, the U.S., and the European market, which all operate in different time zones. So investors use the different operating times of each market to predict what's going to happen.
On the other hand, the crypto market operates on a 24/7 basis, and this makes it easy to access any time and even harder to predict. This often leads to cryptocurrencies' values changing significantly almost every minute.
There is a cap imposed on bitcoin and other famous altcoins. For instance, in the bitcoin case, BTC assets are capped at 21 million, and the moment that figure is attained, mining of the BTC assets will be halted.
Note this limited supply factor is of paramount importance since it ensures that the demand for these crypto assets is always more than its supply. With millions of companies accepting cryptocurrencies, the demand tends to go up while the supply remains limited.
The scenario is entirely different when it comes to the stock market. The market cap is better referred to as market capitalization in the stock market. It's basically the estimated and forecasted value of the business, and this is often very vague.
Market capitalization often leads to companies becoming overvalued and overtraded. In the traditional market, it often leads to the supply surpassing the demand, which never happens in the crypto market.
Risks involved while trading in both markets
Since the emergence of digital currency, the volatile nature of bitcoin and other popular altcoins has been a significant source of concern for many companies.
In most cases, the fall and rise of the value of crypto assets depend on the demand and supply. However, there are some similarities when it comes to the stock exchange since the value of stock market assets is also based on demand and supply.
There is also a notion that the stock exchange tends to be safer since it has some backing from world governments and significant regulations. On the other hand, digital currencies belong to the decentralized Blockchain network. This means that the government does not regulate the crypto market, at least not yet.
Ownership and owner privileges
In the stock market, if you own part of the company by acquiring shares, you have a say in the direction the company should take. The stock market gives its holders the right to vote, and it lets its shareholders make decisions concerning the board of directors.
As a shareholder in the stock market, you are entitled to dividends, (a percentage of a company’s net profit). Note that this market is supported by the value of the firm and they have a legal obligation to create value for the investors.
This is not the same in the crypto world due to lack of regulation and the decentralized nature of the digital assets. In the crypto market, the value of the assets is defined by the assumption of adoption. Unlike in the stock market, the cryptocurrency market does not grant voting rights, ownership or dividends to shareholders and it's not related to the financial well-being of a firm.
The market does not support anything and relies on speculation of adoption. Cryptocurrency companies have no obligation to offer wealth for individuals who hold the currency. Hence they have the opportunity to do whatever they deem right with the value of a crypto coin.
The crypto and stock market are both profitable pools. Nevertheless, the financial industry is evolving and so is the mentality of the individuals involved in these markets. Crypto is accessible to trade 24/7 and obtaining a trading account is an easy task, while traditional markets are somewhat low risk and are regulated. Both markets make a strong case, but it is up to you to pick which one you invest in.