- The recent rise in global cryptocurrency trading took the world by storm as its market capitalization reached heights of $2.5 trillion this year.
- The mechanics of cryptocurrency trading isn’t completely new as it shares similarities with the stock market.
- The influence of the stock market on the crypto market is considerable because the stock market has been around longer.
- Experts suggest that mimicking the stock market might be limiting the growth of cryptocurrencies.
Everything about cryptocurrencies and digital assets seems fascinating from the mining process, to ownership, and actual trading. Assets are discrete and secure on the blockchain and the mining process makes them hard to falsify.
The inception of Bitcoin in 2009 and its subsequent adoption led to the rise of many other cryptocurrencies called altcoins (alternatives to bitcoin). These other coins have added to the robust cryptocurrency trade. Over the years, experts have drawn similarities between the crypto market and the stock market with the crypto market normally mimicking it.
Cryptocurrencies and Stocks: Two related markets?
Both markets have been at the fore of financial asset trading in recent years with the stock market arguably regressing. Although stocks and cryptocurrencies are different assets with holders having different legal rights, many similarities exist between both markets including how investors in both markets react to changes. Furthermore, the influence on both markets from world trends are similar, although the crypto market reacts much faster.
The prices of assets in the stock and crypto markets are determined by demand. The more the demand of a coin or stock, the more its price – less demand of a coin or stock will mean a reduced value.
They are also both influenced by the ideas that power them. Cryptos and stocks are both valued in fiat currencies; both assets are valued with the US Dollar on most exchanges.
Most notably however, cryptocurrencies are decentralized while the stock market is centralized. As a result, many cryptocurrencies are now launching community-driven coins with mechanisms that will assure users that they can’t be manipulated thereby providing a form of regulation-like stocks.
On the Flipside
- Though similarities can be spotted between both assets, the differences are also quite clear and will remain permanently.
- The crypto market being influenced by the stock market might be a good thing for investors as their knowledge of stocks could be used in the crypto market.
- Following the decline in the crypto market, Jim Cramer placed a bet that stocks will gain from the slump.
Crypto’s Constant Changes Received from the Stock Market
Some analysts believe that a crash in the stock market will lead to a slow crypto market. The trading techniques and tools used in the stock market have become very efficient in the crypto market as investment strategies are similar. The knowledge of users in stocks is therefore not a waste and very helpful.
Copy-trading which has been utilized by the stock market is now being utilized by crypto trading platforms. The feature comes with social trading platforms where users simply copy the trades of more successful traders on the platform.
The stop-loss tool, as well as trading bots, are also now used in the crypto market. The crypto market also reacts the same way as the stock market in terms of pump and dump schemes although the former reacts faster.