If you have even a little bit of idea about investing, you would definitely be aware of the stock market. Stocks are basically small units of a business through which you can become a fractioned-owner of the company.
Stock market investing has been in practice since a long time. But these days, there are a lot of new investment options coming up – one such being the new-age cryptocurrencies.
But investing in cryptos can be a bit overwhelming.
Similarity between stock market and Crypto market
When you think about the word ‘market’, what picture comes to your mind? Probably a place where there are vendors selling their stuff, and other people buying these products.
A stock market is like any marketplace, but where you buy and sell companies (such as HUL, ITC and other giants)
These companies(or the shares of the companies) are listed on stock exchanges where people can exchange them for money. The popular exchanges in India are National Stock Exchange(NSE) and Bombay Stock Exchange(BSE).
How do you buy stocks?
In simple 3 steps
- Have a bank account (with money).
- Transfer some money to a trading account
- Buy whichever stocks you want from this money in your trading account
This same operating mechanism is followed in the crypto market.
In the crypto market, there are crypto exchanges where you can buy and sell cryptocurrencies such as Bitcoin, Ether, etc.
These crypto currencies are stored in a wallet.
NSE/BSE is analogous to crypto exchange
Stock Trading account is analogous to crypto wallets
Difference(s) between stock market and Crypto market
There are few major differences between the stock market and crypto markets
- Stock markets are mature and Crypto markets are very new
The NSE was established in India in 1992 (BSE in 1875). Thus the stock exchanges have been in operation since a very long time. This gave them an opportunity to improve processes and reduce friction.
Crypto markets are at a nascent stage. “Bitcoin is the world’s first cryptocurrency, which Satoshi Nakamoto proposed and developed between mid-2008 and early 2009. ”
Thus, as markets mature, their processes improve and friction in the market is reduced.
This also means that the stock market has a lot of historical data through which we can analyse certain trends – a major area in which the baby crypto markets are lacking
- Stock Markets are heavily regulated while crypto markets are…not.
The stock markets of a country are heavily regulated by a central authority – be it the central bank or the government. In India, the SEBI is the principal regulator of the stock market.
In case of cryptocurrencies, they are decentralised i.e. they are not controlled by any central authority. Why is that so? The assumption here is that the underlying blockchain technology is so strong that the cryptos don’t NEED regulation.
As far as government-owned cryptos are concerned, those are not decentralised as they will be regulated by the respective governments. Thus, such cryptos defeat the purpose of being a TRUE CRYPTOCURRENCY.
Can the governments ban cryptos? Short answer, NO. No government can ban cryptos as one can easily transfer their money to a bank account of a different country and buy/sell cryptos from that country. Thus, it is very difficult to BAN A TECHNOLOGY.
- Volatility in cryptos vs. Volatility in Stock market
We all observe that cryptos tend to display a high degree of volatility if Elon Musk(or some other famous personality) tweets anything about it. This is majorly due to the liquidity aspect of the crypto market. Since it is a very new market, very few users are currently operating in it – thus, it can be manipulated easily.
As the crypto market matures and the size becomes bigger, the volatility will decrease and so will the transaction cost.
- Risk profile
In the stock market, there is a lot of trade data. You can look at charts, graphs, observe historical trends, do fundamental or technical analysis and then make a call. Thus, you can lower your risk because you are making an investment based on more available data.
The crypto market, on the other hand, has relatively less quality data available. Thus, the risk profile is higher for crypto markets.
On both these markets, there are a wide variety of assets present – good stocks, bad stocks, good cryptos, bad cryptos etc. You must make a bet based on the INTRINSIC VALUE of the asset.
For example, the intrinsic value of bitcoin is that the supply is limited, which makes it a rare commodity. Similarly, the smart technology aspect of Ethereum gives it a unique intrinsic value.
In the crypto market, knowledge is power. This market is changing massively every single day. It brings with it a lot of risks and a lot of opportunities. There are good cryptos as well as bad cryptos, but the market will grow as we evolve and digital currency gains more prominence.
Thus, do your own due diligence thoroughly and make an informed choice!