Investors who are unsatisfied with the stock market look for alternate investments, and Bitcoin is the hottest market. But cryptocurrencies have a mood of their own, so it is essential to assess your overall return goals and risk tolerance capacity.
Many risks may follow if you consider an individual stock. There are chances it won’t grow, the dividends might get reduced, and comparing performances can build up the pressure to keep up. Stocks are favored because people get guidance to predict the price, whereas bitcoins lack the predictors.
The prices of Bitcoins are highly volatile, entirely depending on the supply and demand. You can find full details on Bitcoin Prime. Although this factor is real with every currency that the value depends on how much people are willing to pay, things are different with crypto. In contradiction to other currencies, like gold or dollar, bitcoins have a smaller market, creating an opportunity for more significant swings.
Bitcoin History VS Stock History
While it is not advisable to predict future performance based on the past, it is useful to look at the price curves to compare different investments.
Till the year 2015, Bitcoin’s price kept fluctuating between $200 and $500. However, 2017 witnessed a sudden surge in the price, reaching around $20,000 in December only to drop below $3,500 by December 2018. In 2020 alone, the price bounced from $3,858 on March 12 to $28,000 in December, breaking all the past highs.
There have been no numerous exchanges in the stocks. The prices have remained stable at around $2000 since 2015. There were a few ups and downs since then, and the present value is about $3,800.
The Dow Jones Industrial Average (DJIA), referred to by people as a stock market index, kept drifting between $17,000 and $18,000 in early 2015. In 2017, when the Bitcoin price was at the peak, the DJIA was around $24,000. Currently, the value is set at around $31,000.
Bitcoin is prominent for its volatile nature and the reason for the big swings in the absence of a natural way to determine its value. The price went to 20,000 because it was all over the news, and people were intrigued to learn more about this investment opportunity. Nobody wanted to miss out. Stocks, on the other hand, are more stable and are backed by long-term and historical support.
Who should invest in Bitcoin?
When you are looking for diversity in your portfolio, bitcoin makes a lot of sense. It is an excellent alternative to shared assets. If you are willing to have some assets that do not get denominated in local fiat currencies and are free from centralized authorities, bitcoin is the right fit.
However, investment specialists have always stressed that investing in Bitcoins cannot be your primary focus. You can only go ahead with the plan if you have some money put aside that you can risk and are comfortable losing. The price can go down to $0 or up to twentyfold. The suggested range is 1 to 5% of your portfolio, depending on your risk tolerance capacity.
Who can be a good fit for stocks?
Most people show faith in stocks, and it is advised that stores should occupy a significant portion of your portfolio. You can develop a value based on a company’s market capitalization, which is the driving factor for changes in the price. It is a more stable investment because a consistent factor backs it.
Short-term volatility is inevitable with any form of trading, but most companies overcome this and evolve stronger in the future. The best option for investing in stocks is to go for either a broad-based index fund or an exchange-traded fund (ETF). There is an adequate chance that you will profit in the long run.
Comparing Bitcoin Trading and Stock Trading
- Exposure to Insider Trading
In any asset, there is an imbalance of information that outsiders and insiders have. The action taken to avoid misuse of this unfair advantage is what creates the difference.
In stocks, the insiders are people like executives or mutual funds who have full access to sensitive information, the latest financials, board room meeting minutes, etc. Similarly, in cryptocurrencies, people who can be counted as insiders are the companies responsible for the circulation of cryptocurrency tokens, mining pools, and large holders. No matter which asset you consider, there is always an unfair advantage to the insiders as they get informed about the critical information sooner than the outsiders. It gives them enough time to buy before rallies or sell before a plunge in the price.
Strict laws protect stocks against insider trading, and some processes are induced to protect the outsiders. The system still has some loopholes, but efforts are made to prevent trading on non-public information by incentivizing the insiders. Even the punishments are exemplary, creating a fear to commit such a felony. They might have to serve jail time or go through reputational damage, severe fines, and profits repatriation.
On the other hand, in the crypto world, there are no such strict laws set out. The reason being the anonymity and unregularized authority promised to Bitcoin users. Cryptocurrency exchanges rarely collect any identity information, so tracking down people who could be responsible for unfair trading is next to impossible. Moreover, the crypto market keeps itself isolated from the government. They do not report suspicious activities to government authorities. Hence, determining whether an action is legal or not and convicting someone on the foundation of illegal activities cannot be an easy process.
- Security Insurance
If you buy stocks through any broker-dealer, both your cash and supplies are insured up to a specific limit. This insurance is provided through government agencies. In case the brokerage goes out of business or steals your deposits, the government reimburses your insured money. Stock investors can have peace of mind and get interested in investing more.
This is not a benefit you receive from cryptocurrency exchanges except a few, which only insure your cash deposits. As Bitcoins are not considered legal securities, providing insurance by government agencies is out of the question. Cryptocurrencies do not fall in the category of legal tenders. There are chances that the exchanges get wiped out by hackers, resulting in investors losing their cryptocurrency assets. Once you lose your Bitcoins, you lose them forever, and there is no government protection you can enjoy. It is necessary to stay updated about the financial health and the integrity of the exchanges you are using.
- Irreversibility and Permanent Loss
Most cryptocurrency exchanges operate online, exposing themselves to the means of hacking. Investors have no other way but to put a lot of trust in these exchange platforms to keep their bitcoins safe. But if hackers find an entry or the owners of the exchanges decide to run away with the money, investors have no way to get it back. There are no chances of legal recourse. Even suing the businesses might not benefit you as they can declare bankruptcy, leaving you with huge losses.
Also, a transaction in bitcoin is irreversible. There’s no chance to get it back if it goes into the hands of the wrong person.
Scams and phishing are not rare with stocks either, but they cannot disappear permanently. There are incidences where hackers have succeeded in wiring investor’s money to themselves, but they have the consolation that can reverse these wires.
- Revenue Backing
Most of the publicly traded stocks are backed by companies that are revenue-generating and holds assets. Any such thing does not back cryptocurrencies.
Let’s take the example of WeTrust tokens. It was founded in 2016, and people do not have complete knowledge about their revenue, user base, or any other tangible products. But that did not stop the market capital from exceeding over $100 million. This valuation was possible because WeTrust could make its investors believe in its product ecosystem’s value, which mainly constitutes a pre-sale. This type of fundraising has the opportunity to close down without fulfilling their promises to the investors. There would be no legal recourse. Such an option is not viable with stocks, which operate in public markets, as there are strict entry requirements.
Stock trading is regulated by strict protection laws in all the developed countries, while cryptocurrencies remain unregulated. But this was the principal founding factor of this digital currency. In places where there is a lack of organized banking systems, cryptocurrencies have brought hope to profit. People enjoy the anonymity and blockchain technology behind bitcoins production; it is difficult to be hacked. It is the exchanges that give in. If you can go through a proper background check and want to cash in some immediate profits, Bitcoin is the asset you can root for.