If you are a new crypto investor or trader, there is a good chance you have heard about stocks and forex trading as well. Perhaps you are even a little more curious about trading equities now that you have learned just how profitable cryptocurrency trading can be. According to a Reddit cryptocurrency survey, an estimated 20 percent of investors in the crypto space are in their 20s and out the bunch, most of them have 90 percent of their saving poured into cryptocurrencies.
As a result, it is no surprise that most of them believe that trading equities and trading cryptocurrencies are the same things. In truth, however, trading cryptocurrencies is totally different from trading equities in the stock market. The risks involved in either sector are different in a variety of ways. Is the risk higher when trading equities or cryptocurrencies? Well, let’s find out.
How is trading cryptocurrencies different from trading stocks?
To begin with, the cryptocurrency world is still in its nascent years while the stocks market has been around for a long time. Currently, the global market cap for stocks sits at 100 trillion and the market has been on a bull run for close to a decade now. On the other hand, the cryptocurrency market cap sits just slightly over the 100 billion mark at the time of writing and in a bear market.
Insider trading vs pump and dump schemes
Any market is bound to have informational asymmetry between insiders and outsiders. The insiders in the stocks market are the mutual fund and company executives who have an unfair advantage over regular investors with zero access to boardroom meetings, and the latest financial data concerning the company shares.
On the other hand, cryptocurrency insiders comprise of ICO executives, the large coin and token HODLers (also known as the whales) and the owners of the largest mining pools and equipment.
As a result of the asymmetry, insiders can game the market to their advantage. Both markets expose the outsiders, to pump and dump schemes that can lead to huge loses.
Here, the risk lies heavy on the cryptocurrency market since there is currently no regulation to keep insiders from manipulating the market. Investing in the stock market is less risky since there are strict insider trading laws that protect the outsiders. Even though the system has loopholes, the punishments for such acts still scare most insiders from attempting to manipulate the market.
Cash and asset insurance
In the US, government agencies such as the FDIC (Federal Deposit Insurance Corporation) and the SIPC insure up to USD 500’000 of both cash and stocks investments. This means that if the brokerage firm you are trading with goes bankrupt; the government will be able to reimburse you up to USD 500’000. On the other hand, most cryptocurrency trading companies do not provide any cash or asset insurance and the only ones that do will ensure your cash deposits and not your cryptocurrency assets (Coinbase and Gemini). Basically, since there is no government protection in case of any crisis, cryptocurrency traders and investors need to be more vigilant about the integrity and the financial health of the exchanges.
Risk of permanent loss
Cases of permanent loss in the stock markets are few and far between. The reason is simple. Even though scams and phishing attacks do exist, it is easy for authorities to track funds stolen as a result of fraud and in some cases, the money is retrieved. The same cannot be said for the cryptocurrency market. Last year alone, over USD 150 million was stolen from exchanges as a result of high profile hacks. Security incidences have become too common in the cryptocurrency trading world. This is mostly due to the fact that it is hard to reverse transactions on the Blockchain. Additionally, cryptocurrency exchanges can easily and conveniently declare bankruptcy in case you sue them.
Price volatility and order protection
In the stocks market, the SEC guarantees investors of the best bid and offer across all existing exchanges. With cryptocurrencies, however, the trader is responsible for finding the best bid and it can be difficult to track an offer since the best bids are all over the place. Plus, there is no legal obligation for the exchange to offer you the best bid or offer. Furthermore, cryptocurrencies have extremely volatile prices that change by 100s or even 1000s in a matter of minutes. Even though stocks can be volatile as well, there is a sense of consistency that you cannot find while trading cryptocurrencies.
Revenue or asset backing
While stocks are publicly traded and backed by the revenue and assets generated by the company, cryptocurrencies are created out of thin air and its only recently that the discussion around backing them with real assets like gold and diamond have started. Most cryptocurrencies have no tangible product or revenue generating business models. In fact, most cryptocurrency companies have in the past shut down shop without warning to the investors while keeping all the raised funds to themselves.
Wrapping it up…
So there you have it. One of the biggest differences that you have to keep in mind when evaluating the risks of either investing in equities or in crypto is regulation. Even though the stocks market is heavily regulated by the government, the laws put in place are like golden rules that protect everyone in the market. On the other hand, regulation is just now starting to catch up with cryptocurrencies. Most governments are apprehensive about the idea and at the moment, investing in the crypto market is a lot riskier than trading and investing in equities.