Recently a question was asked on Quora asking, “How is trading cryptocurrency different from stocks and forex tradin?”
John Hwang who is Senior Options Trader at Morgan Stanley provided us with FIVE differences in his answer to the question which was also featured on Forbes.
Generally speaking, for most of the individuals, investing in cryptocurrency seems like buying stocks from ETrade, Fidelity, etc.
But Hwang says, “There are many, many more differences”. Below are a few as he mentioned:
1: Unlimited Exposure to Insider Trading and Pump & Dump Schemes
When it comes to stocks, what we notice is that insiders are usually people like executives and mutual funds with some sort of material unfair advantage over the outsiders who, of course, have no access to latest financials, insights, etc.
Comparing to cryptocurrencies, the insiders are usually:
- Executives/Owners of the companies behind that particular cryptocurrency
- Mining pools
- Majority holders
Here, insiders usually have access to the core information even before than outsiders, allowing them to trade more efficiently.
Hwang adds, “Unless you are an insider, this informational asymmetry is bad if left unregulated, because it rigs the game in favor of insiders. In the long run, this will discourage outsiders from investing at all, because they want to avoid losing money. If unmitigated insider trading activity dominates, then investors will eventually become jaded with investing in general and move onto other assets that promote fair trading activities.”
In general stocks tend to have strict insider laws and processes. This system ain’t perfect but it definitely clears that the insiders cannot trade on material non-public information at all.
On the other hand, cryptocurrencies usually don’t have any strict laws which offer protection to the outsiders. The main reason is the brisk increase in crypto trading along with different tokens being released on a daily basis.
2: The Lack of Deposit or Security Insurance
Whenever you buy stocks at any of the U.S. broker dealer, both the cash and stocks are insured up to $500,000 each by the FDIC and SIPC. Whosoever your broker is, if they ever go out of business, still the government will reimburse you the loss as guaranteed in the insurance.
In crypto world, there is no cash or asset insurance except a few like Coinbase and Gemini which only insure the deposits you make.
The security insurance like SIPC or FDIC doesn’t apply onn cryptocurrencies as they aren’t treated as legal securities in the US.
Hwang adds, “From a legal standpoint, cryptocurrencies are not legal tenders, which makes their status as asset equivalent to collectibles like Baseball cards or beanie babies.”
3: Not Backed By Any Revenue, Assets or Business Model
It is quite obvious that when we trade stocks, they usually have a revenue, asset or business model and are backed by companies with physical existence.
In comparison to cryptocurrencies, majority of them are quite shady, especially if we look through the past year.
For instance, WeTrust tokens is a company which have no listed figured about revenue, user base and any physical products since its funding back in 2016. Still, they exceeded a market cap of $100 million over the time.
They made it possible by promising investors of the value of WeTrust’s product ecosystem, thus leading to a pre-sale of the token. Despite the pre-sale, there exists no real mechanism as to how the company is accountable to fulfill their promises.
4: The Constant Risk of Irreversible, Permanent Loss
Stocks are safer than cryptocurrency. For example, if a hacker ever steals your private keys, he can easily breach into your exchange medium and loot away all your holding within seconds.
Moreover, all the cryptocurrency transactions are irreversible no matter what. This means, once a loss has incurred, it will remain a loss and no one can help you recover it.
Only in 2017, there has been a $150 million loss in stolen cryptocurrencies.
With scams and phishing attempts increasing day by day, you never know when a hacker breaches your cryptocurrency exchange and make you suffer a big loss.
5: The Lack of Price Consistency Across Exchanges & Order Protection
When you trade stocks there is a guarantee by SEC that your certain limit order won’t be filled by any worse price but for the best offer or bid available across all the exchanges.
When dealing in crypto, what we see is the best bid offer across the place. Also these exchanges have no legal obligation to price match or improve.
This makes picking a reputable exchange very much important.