Being an investor, it’s easy to make the mistake of thinking that investing is the same whether in an individual company’s stock or purchasing cryptocurrencies by the handful. Actually, there are some fundamental differences between trading stocks and trading cryptocurrencies that should be fully understood to appreciate what you’re doing.
Here are a few of the differences laid out to make it simpler to understand.
Market Never Closes?
With stocks, it’s possible to trade them actively during the times when the stock exchange is open. Outside of these hours, some after-market trading might be possible, but otherwise, you’ll have to wait until the next trading day to continue actively trading for fun and profit.
With cryptocurrencies, they operate continuously 24/7/365. Buyers and traders can check the latest prices and, based on a variety of factors including the need to liquidate, seeing an opportunity for a profitable exit, or finding a better crypto coin they prefer, a transaction can be completed.
The only exception to this is when the blockchain or ledger is put on pause to perform essential maintenance to ensure optimal performance. Here you can find the best cryptocurrency exchange to start your trading journey.
With stocks, they trade on a stock exchange where the bid price is fixed at that point in time. Depending on the lot size and the seller, usually, the price is either exactly at the live bid price or almost at that point. When executing an order to buy, it’s usually possible to have a pretty good idea of what the purchase will cost. The same situation is true with sale prices on the seller side of the transaction.
Cryptocurrencies have a price inconsistency with almost all coins. This is because there are multiple cryptocurrency exchanges operating. Some services can obtain better offers because they have access to more exchanges. As a result, the bid price achievable varies depending on the level of access. While this price inconsistency is a little bothersome with crypto, it doesn’t usually make much of a difference.
Valuation Models for Stocks Don’t Apply to Crypto
Valuation models with companies being traded utilize metrics like the price to earnings ratio, the net asset value per share, earnings per share, and more. This helps to understand how costly a share of a business is to purchase.
For instance, the historical average price to earnings ratio (P/E ratio) for US stocks is around 16 which means that investors historically have paid $16 for every $1 of future, potential annual earnings. When accepting a higher P/E ratio on a purchase, it usually means that you’re overpaying unless the company is of exceptional quality and deserves a higher valuation.
With cryptocurrency, none of the above metrics apply. There’s no acceptable way to value a coin with cryptocurrency. Investors and traders decide for themselves how a coin should be valued and often buy on positive sentiment and sell when momentum dies off.
For stock investors, some companies pay a cash dividend on a regular basis. There are also companies that pay no dividends at all. For companies that pay a cash dividend each year, this is investment income that can either be reinvested or used to pay for the investor’s living expenses. This may reduce or remove the need to sell shares to fund living expenses if the dividend payments are high enough.
Cryptocurrency requires traders and investors to sell to raise cash. There’s no income provided from a crypto investment much like there isn’t when buying physical gold bullion. The income must come from other investments in the portfolio.
We hope this article sheds some light on a few of the differences between cryptocurrencies and stocks. However, both certainly have their place in an active portfolio.
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