28th Jun 2021
Crypto Markets Vs Traditional Markets: Can We Compare?
With the current rise (and fall) of Cryptocurrencies and the heightened interest that is steadily sweeping amongst seasoned investors and novices alike, we thought we would compare some key differences when it comes to traditional financial markets and crypto markets.
When considering investing, you cannot approach cryptocurrencies as you would with traditional forms of investment.
Cryptocurrencies and crypto exchanges are manipulated in ways that make adoption a lot harder to assess and thus the crypto asset cannot be measured as simply as one might think.
No investment comes without risk but with more traditional forms it is seemingly easier to assess the value with investments like single stocks.
With traditional assets, we see more regulation, security and it is generally a lot more foolproof for new investors than in crypto markets.
Though with cryptocurrencies underlying blockchain encryption, this is viewed as an innovative measure that protects against traditional threats.
Let us look at the key features of cryptocurrencies and how they present themselves as a pioneering investment.
Real life applications of the asset
Cryptocurrencies such as Bitcoin are driven by the possible adoption and future success of the asset.
What this really means is that cryptocurrencies will in theory only come into practice in the mainstream, if they can be linked to industries that supersede the usual framework.
It is already making headway in certain arenas that would not be so accommodating with traditional investment assets, especially those that need rely on currency exchanges.
The most notable examples of these include bypassing hyperinflation (seen with countries such as Venezuela and Zimbabwe), and the ability to avoid currency controls (the case with China and India).
Appealing to some also, cryptocurrencies offer a reduced amount of government regulations, boasting flexibility and immunity to such economical occurrences and controls.
Future projections and the Crypto Ecosystem
Even though cryptocurrencies have been around for a while, and are rapidly gaining popularity in recent years, they are limited in their practical function.
Undeniably, for the industries that are utilising cryptocurrencies, there is huge potential. In terms of measurement however, it is contained within itself and as such creates a disconnect when measuring data and profit margins.
Though it is an investment worth considering, Bitcoin being the main example, it is contained within a competitive market process and profit margins are thin or virtually non-existent.
In other words, it is not so easy to define how these investments are measured and what they may mean in the present market?
When it comes to cryptocurrencies the focus is on the future potential of the asset.
Regulation or a lack of crypto markets
As we touched on in the introduction, the encrypted technologies that cryptocurrencies offer allow for anonymity and decentralisation.
Though this protects the user against policies that may be a deterrent, this allows for a misuse of the asset and is one that may repel investors due to the lack of regulation.
Depending on your outlook, this may be viewed as a benefit, however, with traditional markets your assets are heavily protected due to government enforced regulations.
Traditional markets also protect inexperienced investors due to the reason of regulation and importantly due to the transparency that they offer.
Of course, the seasoned investors among us could expect to see exceptional returns with cryptocurrencies but with great reward comes great risk and if the knowledge is not there you could fall short.
The volatile nature of crypto assets certainly makes it one that is riddled with uncertainty.
Cryptocurrencies could work for those that are looking to diversify their portfolios, they are also a great digital-based investment and offer variety within their field.
One of the obvious advantages is that they are not tied to a specific currency, which allows you to hold an asset that is unaffected by economic factors (such as hyperinflation).
However, as discussed throughout the article, cryptocurrencies are not only best suited to the seasoned among us, but they are very volatile in nature.
Adding to this, the confusion that surrounds the adoption and measurement of such an asset is one that requires quite a bit of decoding.
With traditional investments, such as stocks, for example, it is much easier to consider the figures and thus values are based on measurable profit margins.
With cryptocurrencies, as we have seen, this is a much more advanced ball game, especially for those that are new to the arena.
When it comes to the traditional assets – equities, property, gold etc. they are in most cases here for the long run and are a much more stable way to expand your portfolio.
Though Bitcoin can grow in leaps and bounds, seemingly overnight almost, it can also fall just as fast – perhaps we should refer to the recent Elon Musk induced crash when he announced that Tesla was suspending its use of Bitcoin.
This is a testament to the unstable and complicated nature of cryptocurrencies.
When it is essentially contained in a limited number of markets (Tesla in this instance), the volatility of the crypto asset presents a complex picture.
The knowledge required to adopt such an investment and the complexities that come with it makes us second guess whether we want to deviate from the traditional forms of investment?
This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity.