Comparing the Cryptocurrency and Traditional Stock Market
Despite Bitcoin’s current correlation with the equity market, Bitcoin will come of age in this financial crisis as it was born for this.
Throughout the history of traditional stock markets, any price movements that do not exceed a 20% loss are considered a correction. Despite the ongoing coronavirus pandemic, oil price wars, and the recent US-China tension, the global market has yet to see a crash in the market prices since the “Black Swan” event on March 18 this year, where Dow Jones Industrial (DJI) Average slid more than 50%. Bitcoin has also registered reduced price volatility of 15% and below, as the cryptocurrency markets anticipate the upcoming Halving event on May 12. Thus, an ongoing healthy correction occurs in the short term in both the traditional and cryptocurrency markets.
The difference in valuation
In a recent interview with Forbes, famous crypto trader and YouTube personality Tone Vays believes that Bitcoin does maintain a correlation with traditional stock markets because they are both “private assets.” He added that the 2018’s Bitcoin bull market may be attributed to the demographic of people who got wealthier and were more willing to speculate on new asset classes like Bitcoin. But he is taking a cautious stance towards the current global economic uncertainty. Many people may be looking for something other than alternative assets, such as Bitcoin, to invest in amid the crisis, which impacted businesses and individuals worldwide. Bitcoin has yet to be primed to replace cash globally, given its short 11-year timeline since its creation.
Currently, possible profits generated by long-standing equity stocks that contain tangible assets of value are backed by legitimate companies and institutions. Compared to cryptocurrency assets, the valuation of equity stocks is more predictable with a proven set of mathematical formulae. Although regulations have been enforced in the cryptocurrency market since the bull market in 2017, there are still many cryptocurrencies, including the forerunning Bitcoin, that reputable companies still need to back, and the value is mainly based on hype and speculations. That is not to say that all cryptocurrencies are pure speculative assets. Chainlink, Tezos, and Ethereum are examples of blockchain projects supported by big tech companies and have obtained valuations based on their functionality.
Varying levels of volatility
According to a recent report from the blockchain analysis firm Chainalytics, Bitcoin’s volatility is increasing, given the uncertainty of the coronavirus pandemic. Even with the aid of technical forecast platforms such as WalletInvestor, the forecast based on machine learning and artificial intelligence may not accurately predict most cryptocurrencies’ yearly and even weekly trends. On the other hand, matured equity stocks are comparatively easier to predict since their volatility levels depend on a fixed set of internal and external market influences, making analysis possible for the traditional stock market. Therefore, the critical factor for the cryptocurrency market to be regarded as mature is time.
Despite the uncertainties from the newly emerging cryptocurrency market, cryptocurrencies do appeal to a specific class of investors – those who are high risk-takers often find the cryptocurrency market attractive as it tends to outperform at times due to its lower market capitalization, making it a favored choice for speculators who are out to generate huge profit within a shorter time frame when compared to the traditional stock market. With significant risk comes great reward; cryptocurrency is a niche investment that does not react like regular stocks and thus attracts nearly a third of millennials as the preferred investing option compared to stocks. Despite its reception, investing in traditional stocks with popular investment apps like Robinhood is still more straightforward. The process of trading cryptocurrencies is more complicated because of the preparation required to determine the instability of the crypto. The crypto price is affected by a combination of factors such as hype, technology, token supply, and ‘FUD’ (https://en.wikipedia.org/wiki/Fear,_uncertainty,_and_doubt), which are uniquely different from stock analysis and forecast.
The purpose of stocks and crypto
Before we jump into the financial aspects of cryptocurrencies, we may have to understand the technology behind it – Blockchain. A good analogy would be blockchain’s similarity to an oil refinery, where cryptocurrency is a valuable by-product of distilled oil. With the growing popularity of popular blockchains like Ethereum, Stellar Consensus Protocol, and Bitcoin, ordinary people can learn how to mint cryptocurrencies or merely engage a skilled individual to mint their very own cryptocurrency. Ethereum, by far, is the most popular blockchain on which many organizations and individuals are building their blockchain-based applications, and ERC-20 remains the most common standard used by ordinary people to create their cryptocurrency tokens. The same cannot be said for stocks since stocks rely on selling products and services backed by reputable companies.
Another point to note is the functionality difference between stocks and cryptocurrencies. Stock options are created solely for fundraising purposes, while cryptocurrencies could serve multiple purposes. After a stringent regulatory implementation phase, cryptocurrencies are categorized into different classifications, such as equity, utility, and security tokens. Some tokens can be used as an in-app reward; others are traded like stock equities.
Possibility of fraud in both markets
Stocks operate within a specific framework of rules and mostly undergo yearly audits to determine their eligibility to be traded on the stock market. Because of the highly regulated stock market, investing in a fraudulent stock is doubtful. Despite the declaration of personal information before listing a stock option on the exchange, deceptive practices in the stock market rarely happened, with a few highly publicized stock scams over the past two decades. Thus, while it is nearly impossible to prevent any bad actors from stock scams, investors could protect themselves by diversifying their investment portfolio, which is one of the reasons many have turned to Bitcoin and some anonymous coins in recent years.
Contrary to popular belief, cryptocurrencies are more susceptible to fraud due to their decentralized and largely unregulated nature. Similar to the traditional stock markets, there are currently, in fact, many, or to be precise, more than 5400 listed cryptocurrencies in the market. Fortunately, the SEC and other government regulators have noticed the prevailing issue in the increasingly popular cryptocurrency market and are enforcing numerous compliance standards for cryptocurrency investing. For instance, many centralized exchanges and payment services are now required to verify users’ personal information through the Know-Your-Customer (KYC) process, just like how traditional stock markets need investors to declare their identity to allow them to trade in the market.
However, it is worth noting that decentralization is the real reason behind the creation of Bitcoin and crypto. Transparency and immutability ensure that a central authority no longer holds transaction data and is permanently etched onto the blockchain, gradually shifting the financial power back to the people. The philosophy behind Bitcoin has bred a new type of privacy focus not found in the traditional market. For instance, Bitcoin and most crypto are not designed to be anonymous, thus lacking the digital privacy protection many seek in this digitally connected world. As a result, a handful of third-party privacy tools, such as Bitcoin mixers, could help the user achieve complete anonymity and privacy while trading with Bitcoin.
Bitcoin mixer is a Bitcoin privacy service that users utilize to obfuscate their transactions, making it almost impossible for blockchain analysts to track them. The best Bitcoin mixers work by randomizing the user’s Bitcoin and returning the same amount of Bitcoins to the user through different Bitcoin addresses assigned by the user. It is helpful to anyone who wishes to make their Bitcoin transactions untraceable since bad actors cannot track the original receiving address of mixed coins through the Bitcoin mixing service. This breaks the transaction trail, offering anonymity to users.
Co-existence of both stock and crypto markets
The stock market is already a well-established institution that can dictate the global economies, while the other is still new to the game of the worldwide market. This fundamental knowledge may not justify the future of crypto markets. However, the potential use cases of cryptocurrencies far exceed stocks used solely for fundraising. Innovative solutions such as Bitcoin mixer Tor and other intermediary products could ensure the privacy and anonymity of anyone who trades with Bitcoin. For the foreseeable future, stock and crypto markets will continue to grow to satisfy different global market demands, with cryptocurrencies leaving a far more significant influence on the end of asset trading.