How Does Cryptocurrency Trading Differ from Stock Trading?
Cryptocurrency trading is a relatively new investment concept and it is easy to understand it based on how it compares with older forms of investment such as stock trading.
By understanding the similarities and differences between the two, we can trade them more effectively.
Both cryptocurrency trading and stock trading are largely dependent on demand and the idea behind them play a big part in how popular they are amongst investors.
Cryptocurrency trading could be closely compared to penny stocks or AIM stocks mainly due to the reason that there is a lot of volatility and speculation.
Cryptocurrency trading is more volatile
Some might see the volatility as a negative, however, it could also be seen as one of the primary reasons traders are interested.
Big swings in the market can mean an opportunity to enter and exit the market.
Some traders, especially those focused on short-term trading, may be able to get in and out of their positions fairly quickly and end up taking small bits of profit each time.
Over the long-term, these small amounts can add up to much more significant gains.
There are however some big differences between the two markets. Even though they are both volatile, cryptocurrency still stands to be much more unstable than the stock market.
This is due to huge swings in the supply and demand and other external factors such as pressure from regulatory bodies.
Cryptocurrency markets are also considered easier to manipulate by its investors than it is with the stock market, which leads us on to our next point….
Insider trading on steroids
Yes, insider trading exists in both stocks and cryptocurrency.
Insider trading or insider dealing is where people trade stocks using confidential information to their advantage and is completely illegal.
However, as cryptocurrency is not properly or at all regulated, insider trading can take place on a much larger scale as there is no one to stop it.
With stocks, there are appropriate laws and regulations in place and while they do not always work as effectively as they should, they do act as a deterrent against such behaviour.
This also means that cryptocurrency is more vulnerable to pump and dump schemes.
Pump and dump schemes are where people attempt to boost the price of a stock or cryptocurrency through recommendations based on false, misleading or greatly exaggerated statements.
The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price.
This practise is illegal and can lead to heavy fines.
To make things worse, information is rarely collected on such people and so tracking them down and punishing them becomes a lot harder.
Regulation needs to catch up with cryptocurrency. This may take several years to happen.
The value of cryptocurrency is still undetermined
When you purchase stocks, you are buying into a company and the value at which you are buying is founded on the value of the company and the services they provide.
Stocks are publicly traded and have an asset-holding backing and generate revenue. Cryptocurrencies, on the other hand, have a value created from promises of what they hope to achieve and on the idea that one day they may be accepted by the masses.
Many critics, such as Donald Trump, say that cryptocurrency’s value is based on ‘thin air’.
Cryptocurrencies can also increase in value for reasons that can be quite unusual. For example, Dogecoin was invented as a joke originating from the popular meme of the same name.
That said, Ethereum and similar cryptocurrencies that focus on dApps and smart contracts may have more value as it is easier to see how they can already be put to use.
The introduction of a new cryptocurrency could also quickly crash the market of another in minutes despite its difference in ideas. Such drastic effects are not often witnessed in the stock market.
Since 2014, the US Internal Revenue Service (IRS) issued that cryptocurrency should be viewed as acquired assets which makes them taxable.
However, the anonymity clause in operation of cryptocurrency makes this a difficult rule to follow up. Saying that it is, of course, always advised to pay up taxes before you get caught!
When you are paying for goods with cryptocurrency, taxes are applied. Much the same as stocks tax will be due on capital gains.
People also read: The 7 Dumbest Mistakes You Can Make When Investing
Cryptocurrency trading is somewhat like forex trading
It’s the same in the sense that often cryptocurrency can be traded against another currency or cryptocurrency.
You can also apply leverage to your trades which is where you effectively borrow from your broker to take up a larger position.
Bear in mind though that you need to pay back your broker for the borrowed amount, even if your trade is unsuccessful and so using leverage can be very risky.
Another similarity is that cryptocurrency requires less start-up money than stocks trading.
Cryptocurrency and forex are broken down into much smaller denominations than stocks which makes them much cheaper to trade and allows more control over the amount of which you want to trade.
Stocks are limited to trading times depending on where the company is based. For example, if you wanted to trade US stocks, you could only trade when the New York Stock Exchange is open.
Cryptocurrencies, whose nature is decentralised, do not have this issue and can be traded at any time of the day seven days a week, wherever you are based.
However, with stocks, you will have a lot more choice than with cryptocurrency. Some of the best brokers offer thousands of stocks to trade.
While there are also thousands of cryptocurrencies to trade, the vast majority are not as trustworthy as the stocks.
Stocks and cryptocurrency can be traded as CFDs
There are plenty of options for trading cryptocurrency out there with cryptocurrency exchanges being very popular.
However, cryptocurrency exchanges are very risky to trade on as they are vulnerable to hacking.
Perhaps one of the most famous cases is when Mt. Gox was hacked and lost approximately 850,000 Bitcoins, which was approximately 6% of the circulating currency at the time.
None of the victims of this attack saw any of their Bitcoins returned and Mt. Gox filed for bankruptcy shortly after.
What makes it worse is that because of the way blockchains work, you cannot just simply return someone’s stolen cryptocurrency.
In the case of Ethereum, after a large hack took place Vitalik Buterin and his team decided to hard fork the Ethereum blockchain to effectively turn back the clock and return what was stolen.
The event led to the creation of Ethereum Classic which uses the older blockchain where the hack had still taken place.
CFDs are a much safer way to trade cryptocurrencies as you never own the underlying asset.
Instead, you own a contract with the broker to buy and sell the market instrument at a certain price, removing the danger of them being stolen.
Plus, with CFD trading, if such an event occurred, your broker will also cover you for losses and compensate you.
Anyone planning to invest in cryptocurrency is doing so at their own risk as with any investment, frankly the same as any other investment.
Here are a few points to consider first before investing in either stocks or cryptocurrency:
- Seek advice from those that have experience (positive experience);
- Long-term investment often yield better results than short-term;
- Only invest if you fully understand it (research, research then research some more!);
- Only invest with extra money (don't invest with money for bills or rent, this is a big no);
- Don't put all your eggs in one basket (even if you think it's a sure thing one of the keys to successful investing can be to diversify).
- Cryptocurrency trading is more volatile. Volatility can be a good thing or a bad thing. Either way, it represents more trading opportunities.
- Both have occurrences of insider trading. Though for cryptocurrency, it has the potential to be much worse and not at all regulated.
- Cryptocurrency is cheaper and more available to trade. Stocks can only be traded at certain times and require more capital to start trading.
- It is safer to trade cryptocurrency as a CFD via a broker. This way you will not be at risk of losing capital if a cryptocurrency exchange is hacked.
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