What Are the Main Differences Between Cryptocurrency Trading Versus Stock or Forex Trading?
Investors who want to invest in and trade cryptocurrencies often make comparisons between the crypto trading market and the forex/stock trading markets. They do this with the hope of understanding the much newer crypto market. While the three trading markets all deal with financial matters, they are not exactly the same. There are quite a number of differences that distinguish crypto trading from stock/forex trading. But what are these differences? And how big are the differences? We will look at how trading cryptocurrency differs from trading forex and stocks.
Access to insider trading strategies
In any given market, the insiders who trade assets are much more knowledgeable about the market than the outsiders. In the stock markets, this situation is more apparent as insiders in the market get to share knowledge about financials and other issues. Outsiders have no access to such information and they will be at a disadvantage in the market from the start.
In the crypto market, insiders are the main players in the market i.e. mining pools, crypto companies, and large holders. These insiders get market information first. This is often bad for outsiders since they might get discouraged and choose to invest elsewhere. The stock market, however, has a number of laws that regulate the market. There are also penalties for insiders who act on non-public information.
Insurance issues
Whether in CFD trading, forex or stock markets, investors have access to some form of security insurance. Institutions like FDIC and SIPC provide insurance to investors. This means that any damages that might occur as a result of the brokerage are covered by these bodies. Investors can get reimbursed when a brokerage becomes bankrupt or collapses.
In the cryptocurrency market, this is not the case. Investors have no access to secure insurance because the market is decentralized by nature. The market is also young and unregulated and investors who venture in it do it knowing the risks. There are a few exceptions in the market though. Some crypto firms have recently provided insurance for cash deposits. As for the larger market though, there is not yet any legal basis for ensuring cryptocurrencies. Until the legal issues surrounding cryptocurrencies as legal tender are addressed, investors will mind their financial health without any government protection.
Asset backing
In the stock market, every stock is backed by particular assets in the market. When an investor buys shares, therefore, they basically own a slice of actual assets in the market. This means that the performance of the stocks boils down to how particular assets are performing in the market. The backing of investment by actual assets thus provides a form of assurance for investors.
The crypto market is different in the sense that cryptocurrencies are not backed by any assets. In fact, all cryptocurrencies have been created without the backing of any value. While the cryptocurrencies have become accepted by many as currency, the market is simply acting on the promise of the digital market and not because there are any actual assets owned by crypto firms. Most of the companies behind cryptocurrencies and tokens have no real products, revenue figures, or assets that they hold. It is in fact, not necessary for any crypto company to have such assets. The crypto market thus depends on the trust that the investors and enthusiasts have on it.
Risk of losses
Both the stock market and the crypto market have risks associated with them. The crypto market, however, comes with a permanent, irreversible loss. If an investor misplaces their keys or a hacker gets away with them, then there will be no recourse as the investment will be lost permanently. The crypto market is set on the blockchain, and while the blockchain is secure, transactions and ownership are permanent. This is why security risks have resulted in huge losses over the past few years.
The price dynamics
Price is important when doing any form of trade. In the crypto market, the bid offers are never constant. Investors are forced to choose an exchange that promises some form of consistency. This is not the case with the stock market. The bid offers in the stock market are usually consistent and traders can make their bids without worrying about abrupt changes. Investor protection laws are also uniform across jurisdictions.
