As a trader, you should know the similarities and distinctions between trading equities and trading cryptocurrencies.
What These Shifts Mean for Investors and Traders
Maybe you’ve observed a meteoric rise in the number of people buying and selling cryptocurrencies and stocks. Anyone, regardless of financial standing, can benefit from investing in assets, both physical and virtual. How, therefore, does cryptocurrency investing contrast to stock market investing? Visit multibankfx.com
This post compares two different types of investments and explains their similarities and differences.
Comparing Stock Market Trading to Investing in Cryptocurrencies
Most investors now use some type of digital exchange, brokerage account, mobile app, or other online platform to participate in the financial markets. Layout, order-book-based liquidity mechanisms, and available trading options are all areas where stock and cryptocurrency platforms are largely consistent. With the advent of cryptocurrency exchanges, investing in digital assets is now as easy as investing in stocks and bonds.
The three primary order types seen on retail trading platforms are the market, limit, and stop (or stop-loss). So that you don’t forget:
- When placing a market order, you’re indicating that you want to purchase or sell the asset at the current bid (for a sell order) or ask (for a buy order), respectively. When you place an order with a market order, you can rest assured that it will be filled, but the price is not guaranteed.
- A limit order is a purchase or sale request for a specified price or better. Both buy and sell limit orders have the potential to fill at either the limit price or a lower price.
- You can limit your exposure to potential loss by placing a stop (or stop-loss) order. The stop price is the price at which the stop order to purchase or sell a security is triggered. An order with a stop price that is reached automatically converts to a market order.
While market orders are presently the only order type available on most DEXs, limit orders, stop orders, and others are all standard fare on most centralized crypto exchanges (CEXs). As the market for cryptocurrency trading develops, more platforms should begin offering these features for buying and selling digital currency. While simplified user interfaces make trading stocks and cryptocurrencies seem similar, there are significant differences between working with these two unique investment vehicles.
DIFFERENCE IN TERMS OF OWNERSHIP
The biggest difference between stocks and cryptocurrencies is what you’re buying. Shares of stock exchanged on a stock market signify a company’s ownership (or equity). Stocks give their owners voting rights and a share of the issuer’s profits as dividends. How cryptocurrencies are utilized and what they represent varies widely.
Many digital assets, like ether (ETH), basic attention token (BAT), and vechain token (VET), are utility tokens meant to be utilized inside a blockchain-enabled environment and do not represent a legal ownership in the entity that issued them. Many cryptocurrencies, like bitcoin (BTC) and stablecoins, have no business use cases and are meant as a store of value. These assets are digital commodities, like gold, but they have no interest in a corporation or its activities.
Each cryptocurrency’s design and ownership implications vary. Even if they weren’t meant as investments or monetary units, many cryptocurrencies can fluctuate dramatically in value. As with regular assets, research cryptocurrencies before buying them.
Many digital assets do not represent a legal position in the issuing organization, but many crypto security tokens are meant to operate like stocks. They represent an equity stake in an issuing corporation and have other programmable properties. These tokens are regulated as securities in several jurisdictions.
DIFFERENCES IN TERMS OF ACCESS, PAIRS AND LIMITS
Most investors trade stocks during business hours. North American stock exchanges typically run from 9:30 a.m. to 4:30 p.m. Crypto markets never close, even during vacations. This makes it easier for people to take fresh positions and enter or exit the market whenever they wish.
Stock-issuing public businesses may issue new shares, subject to internal norms and local legislation. A cryptocurrency’s entire supply is subject to the issuing organization’s internal policies or blockchain protocol code – not laws or policies. Crypto projects can impose verifiable, unalterable hard caps on their overall cryptocurrency supply.
Unlike equities, which are usually bought and sold with fiat currency, cryptocurrencies may be bought and sold in pairs. Most trading pairs involve bitcoin (BTC) or ether (ETH), the two most traded cryptocurrencies. If you wish to trade one altcoin for another, you must first exchange it for BTC. Then, swap BTC for cryptocurrency.
If you wish to avoid additional steps while exchanging one low-market-cap coin for another, use one of the many DEXs that can conduct these trades utilizing automated market makers (AMMs). Not every crypto exchange lets users deposit and withdraw money, but most do. Certain exchanges don’t allow buying crypto using money.
Other Crypto and Stock Alternatives
Low liquidity might occur when trading low-cap coins or tokens or on smaller crypto platforms. In stock trading, liquidity concerns might arise, especially with micro-cap or OTC penny stocks.
By law, publicly traded corporations must provide quarterly financial updates, annual reports, shareholder meetings, and other official means of alerting investors on past performance and predicted future earnings. STO enterprises may have similar reporting requirements, but crypto initiatives are not subject to the same amount of regulatory scrutiny as publicly traded companies.
The legacy financial services system in the U.S. has lasted longer than the crypto ecosystem and has its own governing organizations, such as FINRA, the SEC, and the FDIC. Each regulatory body has its own laws and regulations, including what data a publicly traded company must release.
In contrast, many crypto markets do not mandate individual projects to share their data regularly, making it tougher for investors and industry analysts to objectively analyse how various crypto projects are functioning and whether their assets are worth investing in. However, many crypto projects strive for transparency with regular community updates and open governance. Transparency is a key principle of crypto and blockchain, and most quality initiatives adhere to it.
To Cut the Long Story Short
Depending on how willing you are to take risks, you might want to investigate investing in any or both of these. Including some cryptocurrency in your stock portfolio can be a terrific way to open the door to potentially profitable returns and add some valuable diversification to your stock holdings, all without exposing yourself to the full extent of the dangers associated with either investment.