Before you go and spend your hard earned money on those digital coins, you need to know one thing: cryptocurrency investing is not at all like stock trading.
The differences between these two assets, when not known, could break an investor and make them lose faith in digital currencies altogether. Yet, armed with the knowledge of the key dissimilarities between the two will give the avid coin trader an advantage over the rest of the crown, especially when investing in that big boy on the block – Bitcoin.
There are insiders in every financial market which have access to information that the majority of the public do not have access to. This is true for both stocks and cryptocurrencies. However, the main difference is that insider trading in the stock world is illegal and monitored by a governing body like the SEC, while Bitcoin and other cryptocurrencies currently do not have any governing body or policies governing insider trading.
This lack of regulatory policy towards insider trading encourages executives, large investors, and mining pools to engage in such unfair activity that allows them to maximize their profits and buy when they know the good news and sell before bad news hits the streets.
Ultimately, if unchecked, such trading activity will dissuade investors from entering such unregulated markets and the entire market itself could experience a downturn and maybe even a shut down altogether.
As more and more legislative talks continue around the regulation of Bitcoin and other large digital currencies, the number of insider trades should minimize but until that time investors should know that they are up against people who have an unfair advantage during every single trade they make.
In a nutshell, stocks are insured, cryptocurrencies are not.
At least in the U.S., if you purchase any stock or deposit any cash at a registered broker, the SIPC will guarantee both your cash and stocks up to $500,000 under U.S. Government law.
With cryptocurrencies, neither cash or coin holdings are insured with the exception of two brokerage exchanges that will insure cash deposits only.
Stock traders are well aware that if something happens to their brokerage dealer they will at least retain $500,000 of their cash or stock holdings. Cryptocurrency traders, on the other hand, are completely out of luck should something happen to their brokerage dealer. Basically, they will have nothing to show for their investments if their broker goes belly up.
Cryptocurrency investors should, therefore, be very careful as to how much they invest in digital currencies.
Behind every stock there is a company with assets – cash, revenues, dividends, buildings, equipment, etc…
The same can not be said about cryptocurrencies as most of them have been created from nothing and as of now hold no value except for a potentially perceived value sometime in the future.
Having no assets or tangible qualities by which to measure it by, makes “crypto-valuing” very difficult, which also makes it extremely hard to trade.
How does a coin investor know when the actual coin is trading too high or too low if they do not have any gauge by which to measure it by?
Unlike stocks, which have both historical value and current tangible assets by which to measure them by, digital currencies are driven by perceived value alone, which can drop or rise without any logic-based valuation system behind it. This makes it more of a speculative tool than an investment vehicle.
The above information is solely intended to provide investors with the knowledge that stocks are geared towards investors while cryptocurrencies (at least as of right now) are tailored for those of a more speculative nature. Once more regulation for cryptocurrencies are set in place, this may change.
However, just because Bitcoin and its other digital counterparts are driven by speculation does not mean one can not make money with them. It just means that one should allocate only a portion of their investing dollars to cryptocurrencies and not bet the farm on them.