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Many investors who want to enter the cryptocurrency market have never before encountered such financial instruments. However, most of them have at least some understanding of the stock market. But, this knowledge will not do them a good job while trading digital currencies.
Here is the answer from John Wang, a former senior option trader at Morgan Stanley:
Many beginners believe that investing in coins or tokens is the same thing as buying shares of Fidelity or ETrade. In fact, everything is completely different. There are a lot of differences and here are a few of them.
Insider Trading and Pump and Dump Schemes
If we are talking about stocks, then insiders are people from management who have mutual funds and are aware of all internal affairs — an unfair advantage against outsiders who are not always aware of the latest news, meetings, etc. In the cryptocurrency sense, insiders are divided into the following types:
Owners of mining pools;
No matter what type insiders belong to, they always get important information before outsiders, and this allows them to buy before the price goes up, and sell before it falls.
If you are not an insider, then this unregulated information disparity is not on your side. This, ultimately, will generally alienate outsiders from investing. If there is too much insider trading, investors will simply invest in other things that provide more fair opportunities.
This is the reason why stock exchanges have strict rules about insider trading in defense of outsiders. They do not work perfectly, but at least they motivate insiders not to sell material non-public information. If insider trading is discovered, you can simply lose your reputation, or you may need to return all the money, pay a considerable fine, or sit in jail for a while. This is enough to scare insiders.
There are no such rules in crypto trading. Just because they needed to be created even before this sharp increase in the popularity of cryptocurrency, besides, many coin developers operate outside the United States. In addition, many exchangers do not have information about their owners, place of registration, etc. Therefore, it is extremely difficult to track down responsible for these activities people. The exchanges do not report on all sorts of suspicious transactions to the state.
When you buy stocks through any broker in the US, you get $ 500,000 in insurance for both cash and stocks. Cash insures the company FDIC, shares — SIPC. This means that if your broker drops out of the game along with your deposits, the state will reimburse you for your losses up to $ 500,000. Such insurance allows investors to relax.
Crypto brokers do not insure either. Coinbase and Gemini are the only ones to insure cash deposits.
Cryptocurrencies are not even considered as legal securities, so SIPC insurance is not applicable here. From a legal point of view, they are not a legal tender and are the same as collectible baseball cards or soft toys. Thus, the exchange can lose all deposits, and the state will not help investors. Therefore it is necessary to take special oversight in relation to the exchanges.
First of all, stocks and cryptocurrencies are similar on this subject they cost exactly as much as investors are willing to pay for them. If the stock / currency costs $ 10, and the seller decided to sell it for $ 100, then the cost will increase to $ 100 if he is lucky enough to find a buyer. In a sense, the only thing that matters is the price at which buyers / sellers are willing to buy / sell their asset. However, unlike cryptocurrencies, various methods are used to evaluate stocks.
The P / E ratio
The P / E ratio is calculated by dividing the market value of a share by earnings per share. Thus, a P / E of 20 means that the investor is willing to pay for the paper 20 times more than the annual profit attributable to it. To decide whether a purchase is profitable, it is necessary to compare the P / E ratio with similar indicators of other companies in the industry.
NAV per stock
Net asset value (Net Asset Value, NAV is a measure of a company’s value calculated using accounting indicators. It is calculated by summing all assets and subtracting liabilities and intangible assets, such as brand value and company prestige. In other words, this is money, who will remain with shareholders if tomorrow they decide to sell the company and pay off all debts to creditors.If the price of shares is lower than NAV, their purchase is profitable because you acquire assets of the company cheaper than their real value.
Discounted Cash Flow
The Discounted Cash Flow (DCF) model is a bit more complicated. In this case, you predict the total profit of the company for a certain period and express it in money at current rates. The resulting estimate can be compared with the current share price. If it is higher, the stock can be considered attractive.
None of the above models work with cryptocurrencies — since all of them are based on financial statements and forecasts of public companies. Alas, cryptocurrency startups are not required to publish their results and forecasts. Thus, the data required for such assessments are simply not available (but even if they were available, the cryptocurrency does not give its owners any rights to the company’s assets). As a result, no one knows the “true” value of digital currencies, and this is a significant risk when investing in cryptocurrency.
The big difference between stocks and cryptocurrencies at the conceptual level is that the latter do not give the right to share in a startup. If the investor owns 1% of the shares, then he owns 1% of the company. In the event of bankruptcy, he is entitled to receive 1% of the remaining assets (after paying priority debts). He also has the right to vote at general meetings of shareholders.
On the other hand, an investor who owns a certain amount of cryptocurrency does not have any rights to the assets of the company that issued it and does not participate in voting. However, some argue that the right of ownership and the right to vote do not matter, because first of all investors are interested in returns on investments, rather than participation in the management of a company or a share in its assets.
Another important difference: the shares are strictly regulated. There are many rules and regulations regarding what companies and investors in the stock market should and should not do. For example, the rules prohibit trading on the basis of insider information (inside information that could affect the price of a company’s stock). In other words, the investor cannot use the information he has to get a benefit.
However, there are no such restrictions on the cryptocurrency market. This can be illustrated with an example:
“Robert works for some ABC company. She issued shares traded on the stock exchange, and tokens, bargaining on cryptoexchanges. Robert learns that ABC has developed a super-efficient and revolutionary technology, the announcement of which is scheduled for Wednesday. If on Tuesday, Robert buys shares, he can be held accountable for trading on the basis of insider information. However, if Robert buys tokens, it will be impossible to punish him — and he will be able to earn good money by selling them after the announcement on Wednesday.”
The stock market is open only during the day. Nights and weekends exchanges are closed. Investors have enough time to sit comfortably in a chair and analyze their deals.
In the world of digital currencies this is impossible. Cryptocurrency exchanges work around the clock, seven days a week, including weekends and holidays (even during the New Year and Christmas). In other words, digital currencies are not suitable for investors who do not know how to relax while the market is running.
We can make a simple conclusion: investment in cryptocurrency is more dangerous than in stocks (but there is much more profit there). In the case of stocks, the SEC (Securities and Exchange Commission, USA) ensures that your limit orders are executed at a price that is not lower than the best offer price or the highest bid on all exchanges.
With a crypto, the best deal is available on any exchange, and the law does not oblige them to coordinate and change the value of the coins.
Therefore, it is very important for a crypto-trade to choose a really good exchange.
The choice what type of trading to choose is yours. Make it based on your principles and priorities.
In almost all developed countries, stock trading is regulated by strict laws for protecting investors. Crypto-trading is not regulated by anything, and most exchanges operate freely according to the laws of any country. And for the average investor this non-regulation has its consequences.
Basically, the cryptocurrency market has more flexibility (it is active around the clock and allows more transactions). In addition, profit potential is much higher in crypto world (mainly due to volatility).
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