Cryptocurrency trading is a relatively new investment concept and is easy to understand based on how it compares to older forms of investing such as stock trading.
By understanding the similarities and differences between the two, we can exchange them more effectively.
Both cryptocurrency trading and stock trading are largely dependent on demand and the idea behind them plays a big role in their popularity among investors.
Cryptocurrency trading could be closely compared to penny stocks or AIM stocks mainly for the reason that there is a lot of volatility and speculation.
Cryptocurrency trading is more volatile
Some may see volatility as negative, however, it could also be seen as one of the main reasons traders are concerned.
Large 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 making small profits every time.
In the long run, these small amounts can lead to much more significant gains.
However, there are some major differences between the two markets. Even though they are both volatile, cryptocurrency is still much more unstable than the stock market.
This is due to huge swings in supply and demand and other external factors such as pressure from regulatory bodies.
Just look at the historical Bitcoin prices from 2009-2020. Over the course of 10 years, Bitcoin went from $0.00 at its low to $19,343.04 at its high.
Cryptocurrency markets are also considered easier for its investors to manipulate than the stock market, which brings us to our next point….
Insider trading with steroids
Yes, insider trading exists in both stocks and cryptocurrency.
Insider trading or insider trading is where people trade stocks using inside information for their own benefit and it is completely illegal.
However, as cryptocurrency is not properly or not regulated at all, insider trading can take place on a much larger scale as there is no one to stop it.
With escorts, there are appropriate laws and regulations in place and while they don't always work as effectively as possible, they act as a deterrent against such behavior.
This also means that cryptocurrency is more vulnerable to pump and dump schemes.
Pumping and dump schemes are places where people attempt to raise the price of a stock or cryptocurrency through recommendations based on false, misleading, or grossly exaggerated claims.
The authors 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 practice is illegal and can lead to heavy fines.
To make matters worse, information is rarely gathered about these people and thus tracking down and punishing them becomes much more difficult.
Regulation needs to catch up with cryptocurrency. This could take several years.
The value of the cryptocurrency is still undetermined
When you buy stock, you are buying into a company, and the value you are buying at is based on the value of the company and the services they provide.
The shares are publicly traded and have asset holding support and generate revenue. Cryptocurrencies, on the other hand, have value created by the promises of what they hope to achieve and the idea that they may one day be accepted by the masses.
Many critics, such as Donald Trump, argue that cryptocurrency's value is based on 'nothing'.
Cryptocurrencies can also increase in value for reasons that can be quite unusual. For example, Dogecoin was invented as a joke originating from popular memes 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 used.
The introduction of a new cryptocurrency could also cause another cryptocurrency to collapse quickly in minutes despite its difference of ideas. Such drastic effects are not often seen in the stock market.
Since 2014, the US Internal Revenue Service (IRS) has issued that cryptocurrencies should be viewed as acquired assets, which makes them taxable.
However, the anonymity clause as a function of the cryptocurrency makes this rule difficult to follow. Saying that it is, of course, always advised to pay taxes before getting caught!
When you pay for goods with cryptocurrency, taxes apply. More or less the same tax on shares will be payable on capital gains.
Cryptocurrency trading is a bit like forex trading
It is the same in the sense that often cryptocurrency can be exchanged for another currency or cryptocurrency.
You can also apply leverage to your trades, which is where you actually borrow from your broker to take a larger position.
Keep in mind though that you need to repay your broker for the borrowed amount even if the trade is unsuccessful and so using leverage can be very risky.
Another similarity is that cryptocurrency requires less startup money than stock trading.
Cryptocurrency and forex are split into much smaller denominations than stocks, which makes them much cheaper to trade and allows for more control over how much you want to trade.
Availability
Shares are limited to trading times depending on where the company is based. For example, if you want to trade US stocks, you can only trade when the New York Stock Exchange is open.
Cryptocurrencies, whose nature is decentralized, do not have this problem and can be traded at any time of the day seven days a week, wherever you are.
However, with stocks, you will have a lot more choice than with cryptocurrencies. 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 reliable as stocks.
Stocks and cryptocurrencies can be traded as CFDs
There are many options for cryptocurrency trading out there with very popular cryptocurrency exchanges.
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 around 850,000 Bitcoin, which was around 6% of the currency in circulation at the time.
None of the victims of this attack saw any of their Bitcoins and Mt. Gox filed for bankruptcy shortly thereafter.
What makes it worse is that because of the way blockchains work, you can't just return the stolen cryptocurrency to someone.
In the case of Ethereum, after a big hack Vitalik Buterin took place and his team decided to hard fork the Ethereum blockchain to go back in time and return what was stolen.
The event led to the creation of Ethereum Classic which uses the old blockchain where the hack had still occurred.
CFDs are a much safer way to trade cryptocurrencies as you never own the underlying asset.
Instead, you have a contract with the broker to buy and sell the market instruments at a certain price, eliminating the danger of them being stolen.
Also, with CFD trading, if such an event occurs, your broker will also cover you for the losses and compensate you.
My Final Thoughts
Anyone planning to invest in cryptocurrency does so at their own risk as with any investment, frankly like any other investment.
Here are some points to consider before investing in stocks or cryptocurrency:
ⓐ Seek advice from those who have experience (positive experience);
ⓑ Long-term investments often produce better results than short-term ones;
ⓒ Invest only if you fully understand it (research, research and research again!);
ⓓ Invest only 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 safe, one of the keys to successful investing may be diversification).
Key Points
ⓐ Cryptocurrency trading is more volatile. Volatility can be a good thing or a bad thing. Either way, it represents more trading opportunities.
ⓑ Both have insider trading episodes. Although for cryptocurrency, it has the potential to be much worse and not regulated at all.
ⓒ 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 through a broker. This way you won't run the risk of losing capital if a cryptocurrency exchange is hacked.