Cryptocurrency investments have become increasingly common over the years. More and more people are adding cryptocurrency investments to their existing capital investment portfolios. Some are even choosing to invest exclusively in the cryptocurrencies market instead of in the traditional stock market. These two investment environments have both similarities and differences of which you should be aware. In this article, we will list some characteristics of both markets.
The cryptocurrency market
The cryptocurrency market is known for its volatility and speculative nature. These two characteristics attract many people to this market while putting off others. Investors who have time can make extraordinary gains in almost any market, but those attracted to big potential gains in short periods see the crypto market as a great alternative. However, the higher the potential return, the greater the risk. In addition to general price fluctuations, there are other important risk factors.
It is a young market
Most of the cryptocurrency projects are very young because the market itself has not existed for a long time. This market exploded in popularity during 2017, and the number of projects in it has increased dramatically. Most of the crypto assets available still have not reached their intended usage statistics, which means that most of the owners of these assets have them for the only purpose of waiting until their demand increases to then sell them for a profit. Again, this relates to this market being very speculative, meaning potential gains are high, and so is the risk.
Just like with regular business, statistics show that most new businesses related to crypto fail. When this happens, the cryptocurrencies associated with the project lose value and the associated investments have negative returns. On the other hand, successful project regularly present very large returns for their investors, so analyzing the risk you are confortable with is paramount.
Intuition and feelings play a big role
Regardless of whether the underlying project works well, the prices of individual cryptocurrencies are strongly influenced by general sentiment. This is also true for businesses in the regular stock market, but it is more prevalent in crypto. Altcoins are frequently created whenever bitcoin enters the bear market because bitcoin is the most popular cryptocurrency and the market seems to think that others will follow.
Investors try to predict these periods and use them as a tool to increase their earnings. This is a double edged sword though, because several stable projects have failed after the market overestimates their position.
Another significant risk in this market is the threat of fraud. Many projects are taking advantage of this new market and the high expectations of individual investors to fill their pockets with a “nearly zero” effect relatively easily. Quick derivatives do not exist in this growing market. However, more options have gradually appeared, including investors trading options and futures. These areas are already seeing strong growth but should develop further as markets mature.
The well-established stock market
Generally, the stock market is considered to be less volatile than the cryptocurrency market. This lower volatility generally relates to a lower effective risk. This is for the following reasons:
This market has more participants and capital, increasing liquidity. By becoming a shareholder, an investor becomes an actual, real company owner. Generally, businesses in the stock market have a revenue stream, not just a token that derives value from (expected) use. This makes it easier to estimate the fair value of the stocks.
The stock market is not entirely fraud-free, but it is a much more secure environment for investors than the cryptocurrency market. In the United States, the Securities and Exchange Commission is in charge of regulating the stock markets and providing security to all participants. They have clear rules so that the market is as transparent and secure as possible for both investors and businesses. It is important to note that similar organizations have appeared in the crypto-world, but they are incipient and still have a long way to go.
The stock market offers a wide range of derivative products sold in large quantities, including options, futures, and sprinters.
The efficiency of the stock market is very high since it limits price movements, thus reducing risk compared to cryptocurrencies. However, this also means that potential investment growth is low.
What option should you choose?
Both markets can be advantageous. How to invest money depends on your appetite and your investment goals. Keep in mind that this is a general comparison between cryptocurrencies and the stock market. Especially in the stock market, a company’s risk can vary widely depending on the industry, size, liquidity, country, etc. This all means that every investor should research their options and choose what is better for his own circumstances and intentions.
For more information on the differences and similarities between these markets, click here.