What are the strategic differences in trading with cryptocurrency compared to stocks?

by on December 21, 2020

Trading on the financial market offers numerous opportunities for buying and selling. However, there are some financial products that are particularly popular. This is, on the one hand, the stock market, which has been operated for many centuries and, on the other hand, trading with currencies. This has also been offered for a long time, but for some years now there has been an exotic novelty. The so-called cryptocurrencies really shook up the financial world in 2009. For some, they were considered a great hope for the economy, and for others, the greatest risk of all. Now it is also possible to trade with cryptocurrencies on the financial market. This has not only differences, but also similarities to stock trading. What these are and which strategies are to be applied, will be examined once in more detail in the following article.

The first shares existed as early as the year 1200, around which time the first shares in companies and projects were issued. The background for the company in issuing shares is to raise new cash. A share is a security that gives the buyer different rights and obligations. The initial purchase is between the company and the shareholder, after which the buyer may sell his shares to other market participants. Through the purchase, the company receives an injection of funds and can thus make new investments on the market itself. The background thought of the buyer of a share is that the value of the share will increase or the company will be successful in the market, which will eventually generate profits, to which the shareholder is entitled, depending on the number of shares he owns. Other possibilities of income from shares happen through interest and dividends or also the possibility of selling the share to other market participants for a profit after an increase in value. Accordingly, trading in shares has certain similarities to the purchase of real estate or even gold. After the investment one assumes an increase in value. 

The risk of share trading

The goal of buying a security is therefore to make a profit by making an investment and either receiving its dividends, interest and profit shares in the long term or selling the share again to other market participants after an increase in value. The risk in trading lies in the fact that the value can of course also be reduced. This happens, for example, through negative news about the issuer (the publisher of the share), failures on the market or also through social and technological developments. If this is the case, the buyer makes losses. The buyer must therefore make a comprehensive analysis of the company, its opportunities, activities, potential, competitors and the market in general before buying. Then an evaluation can take place, which finally leads to the fact that one buys shares of a company or not. 

Trading with currencies 

Another part of the financial market is the Foreign Exchange Market, abbreviated as Forex, which includes trading with currencies. In contrast to the stock market, currencies are not bought and then sold again for a profit, but rather the price developments are gambled on. The prices in the chart can rise or fall. This is where the so-called binary options come into play. As a participant in the Forex market, you can either take a “call” option, which is the expectation of a rising rate, or a “put”, which is the option of a falling rate. The basis is all the currencies of the world with their respective exchange rates. As a concrete example, the EUR/USD, which is currently at 1.17 points. If you would exchange 100 Euros against the American Dollar, you would receive 117 US Dollars. As a trader on the Forex market, trading looks like this: for example, one assumes a rising rate, selects a “call” option and if the rate reaches this value within the selected time frame, which can be between one second and several months, a profit is made. However, if this price falls, the money is lost and all of it. This is different from stock trading, where the value cannot completely run out of money, but is gradually diminished over the term. In Forex, there is either everything or nothing to get.

Cryptocurrency trading

Although the article is about the differences between stocks and cryptocurrencies, after a cryptocurrencies is still a currency, it is beneficial to understand the basics of the Forex market. Cryptocurrencies are a very special product in the financial market, because they have characteristics like normal currencies and also of shares. They can be traded either with “call” options and “put” options, or they can be bought like a normal investment. This is the strategic difference from trading stocks. If a cryptocurrency does not have a high value and is not expected to increase in value much, it is still possible to trade it by betting on the price performance of a particular cryptocurrency. On the other hand, it is possible to buy individual shares or even complete cryptocurrencies and then expect an increase in value. 

The most famous cryptocurrency is bitcoin. At its zenith, this had a value of just under $20,000 for one Bitcoin. The value has fallen again very quickly, but nevertheless, some investors earned an unparalleled return with them after they bought a Bitcoin for a few dollars many years ago and thus, betting at that very moment that the price will fall. So with cryptocurrencies, profit making is possible through trading, on the price trends up and down, as well as a way of investing. A clear advantage of cryptocurrencies is that the trade can be completed a lot faster, because time frames can be selected, as in Forex, of 60 seconds, for example. 

The trading place for cryptocurrencies and shares. 

Trading takes place online on the Internet. On the platforms of online brokers, it can be seen at first glance which provider also has cryptocurrencies in its repertoire. A comparison site that has conviction for trading with cryptocurrencies is Bitreviews.com. What is generally important when choosing the right broker are the licenses, the certificates from different testing agencies and, of course, the positive customer reviews. For new customers, two aspects in particular are essential. The first is the free provision of analysis tools and the offer of a demo account. The latter offers the possibility to trade with virtual money and thus gain risk-free experience. The technical analysis tools are ingenious tools, which automatically analyze the chart of a financial product and detect trends. This makes trading a lot safer. These tools can also be used for cryptocurrencies and with them you are able to analyze the chart for price developments as well as increases in value for investments. Of course, stocks are also an integral part of online brokers as well as topics, news and explanations about the financial market, its products and their trading.