Cryptocurrencies are digital assets protected by strong cryptographic algorithms and powered by blockchain technology. Stocks, on the other hand, could be referred to as equities or shares. They represent proportionate ownership in a company or corporate organization.
Cryptocurrencies that have been around for slightly over a decade have witnessed massive adoption. This is evident in the current market capitalization of major digital coins like Bitcoin, Ethereum, Tether, and the recently developed Polkadot. But stocks have been around for hundreds of years.
Stocks and cryptocurrencies are being traded by investors in both spaces. Trading these assets often come with the aim of making profits.
Although it may be argued that the cryptocurrency market is driven by speculation, trading in both markets is driven by the forces of demand and supply.
Several questions are often asked when it comes to dealing with stocks and cryptocurrencies. These include the impact of crypto on stock markets, which of the markets is more volatile, which market performs better, if stock investors should worry about crypto, and many more.
This article aims to answer a number of these questions, starting from the impact of cryptocurrencies on the stock market, as well as the volatility of both markets.
Impact of Cryptocurrencies on the Stock Market
Studies have shown that a significant relationship exists between the cryptocurrency market and the stock market performance in the Middle East and North Africa region.
As the value of digital currencies continues to increase, there are chances that making investments with companies that have direct or indirect investments in cryptocurrency could lead to better profits.
Due to the susceptibility of fiat currency to inflation, fiscal and monetary policies, as well as regulation, investors are now attracted to cryptos. The increase in the demand for cryptocurrencies has made companies with cryptocurrency exposure to be highly sought after.
For example, when Tesla (TSLA) picked interest in Bitcoin at the beginning of the year, the price of Bitcoin hit an all-time high, reaching nearly $59,000. In the same vein, Tesla became overly popular for its electric vehicle, leading to an increase in the price of its shares. Its shares were pegged at $709 at the beginning of May 2021.
The volatility of Crypto and Stock Markets
Volatility simply means how large the price of an asset — in this case, stock or crypto — swings around the average price. Statistically, it is the measure of the dispersion of returns of an asset.
Beta coefficients, option pricing models, and standard deviation of returns are ways used to measure volatility in the stock or cryptocurrency markets. Volatility is always accompanied by big swings in either direction (high or low), triggering an amount of risk or uncertainty.
When volatility is high, it means the value of an asset fluctuates dramatically, making it unstable. The reverse is the case when volatility is high. Volatility affects both the cryptocurrency and stock markets, however, there are indications that suggest that volatility is more in the crypto space.
A perfect example is the Bitcoin crash that happened in May 2021. This downward volatility was triggered by an announcement from electric vehicle maker, Elon Musk, noting that Tesla will no longer accept Bitcoin for its EV.
“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about the rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel. Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment. Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction,” Musk’s announcement read.
CoinDesk’s head of research, Noelle Acheson, thinks that the volatility in the crypto market is not a bug but a feature because it highlights the relative freedom of the market. He notes the crypto market could go over the board in terms of volatility because there is no central authority to stop them from being so. (Link).
Bitcoin — Stock Market Correlation
Though Bitcoin was meant to be an uncorrelated asset, major analysis now shows that this digital coin now correlates closely with stocks.
According to Clem Chambers, the CEO of ADVFN.com, Bitcoin leads the movement in the S&P 500. He adds that until stocks and Bitcoin decouple, Bitcoin is going to be a valuable indicator for stocks.
Strategists also believe that Bitcoin and stock markets could trade more closely as several individuals and institutions continue to adopt cryptocurrency.
According to NASDAQ, Bitcoin’s correlation to the stock market hit an all-time high in 2020. This feat was attributed to the rise in adoption, high trading volumes, as well as payment networks enabling Bitcoin and digital asset trading on their platforms.
Major Differences Between the Cryptocurrency and Stock Market Investment
There are four major factors that distinguish both markets. These include ownership, issuance limits, market access, and trading pairs.
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Right of Possession
While shares traded on a stock market are securities that represent a percentage of ownership in a company issuing the stock, cryptocurrencies are different in terms of entities represented and usability.
Stock ownership may give access to certain entitlement such as voting rights or return on investments in the form of dividends.
Though many digital assets do not represent a legal stake in the issuing organization, certain types of crypto security tokens are designed to act like stocks.
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Sales limits
Many companies that issue publicly traded stocks may do so based on their internal regulations and other relevant modes of operations. On the other hand, the total supply of a digital currency is subject to the issuing organization’s internal policies or the blockchain protocol code it was designed with.
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Access to markets
Access to the cryptocurrency and stock market is a major distinguishing factor. The cryptocurrency market can be accessed at any time of the day — both day and night and even weekends. It is safe to say the crypto market doesn’t sleep.
On the other hand, stock trading is restricted to set business hours. For instance, stock exchanges based in North America tend to operate between the hours of 9:30 a.m. — 4:30 p.m, while in Africa, it is usually within the hours of 9:00 am and 4:00 pm.
In essence, the digital currency market is more accessible.
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Pairs the assets are traded against
Typically, stocks are traded with fiat currency, which crypto may be bought with fiat or another digital asset. An example is trading Ethereum against Tether.
How Cryptocurrencies Disrupt the Stock Market
Some may see it as being ambitious. But crypto enthusiasts are quite positive that cryptocurrencies will disrupt the stock market.
This disruption will be by challenging the dollar standard. The notion of the US dollar being the reserved currency of the global economy is gradually changing. This is due to the growth and adoption of digital currencies.
Cryptocurrency, especially with the rise of stablecoins, is changing international trade dynamics. International trades have always been facilitated with the USD. But attention is now being diverted to crypto because it is fast, secure, and has lower transaction processing fees.
Should Stock Investors Care About Cryptocurrencies?
As discussed earlier, evidence shows that Bitcoin correlates with the stock market. Therefore, it is important for stock investors to pay attention to Cryptocurrencies.
A study to examine the effect of Bitcoin’s upside and downside movement on the stock market showed the influence of the digital coin. Results suggested that stock market returns were positively related to the realized variance across various market conditions, both bullish and bearish.
Investment Risks in Both Markets
Investing in stocks and cryptocurrency are both risky adventures to embark on. However, it is believed that crypto investments pose a greater risk.
DeFi Planet suggests that before investing in digital currencies, it is important to research and speak to a financial/crypto advisor. This is because the market is driven by speculation and is not governed by a central authority.
Crypto and Stock Trading Indices
There are several exchanges and brokers that offer platforms for trading crypto and stocks. The S&P 500, NASDAQ, London Stock Exchange, and other trading platforms offer insights into the stock market. These insights cover trading volumes, market capitalization, and live prices of various stocks.
Other platforms like Binance, Coingecko, Gate.oi and Bitfinex do the same for crypto.
These platforms have charts where analysts and traders can map out patterns to help them predict the movement of the market.
In Conclusion…
- Cryptocurrencies are digital assets protected by strong cryptographic algorithms and powered by blockchain technology. Stocks represent proportionate ownership in a company. Investors are actively involved in trading in the crypto and markets. Ownership, trading pairs, market access, and issuance limits are factors that differentiate these markets.
- The gradual disruption of the stock market by cryptocurrencies is gradually materializing. This is evident in the increased global adoption of digital coins, as well as the use of stable coins to facilitate international trade.
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