The rise of cryptocurrencies has led to many things changing in the marketplace. While the traditional is still part of our lives, the crypto space is increasingly taking over the headlines, and not surprisingly, its acceptance has been incredible in recent years. With this being a reality, Kimberly Rosales, an expert in the cryptocurrency industry, provides some key differences between the traditional market and the cryptocurrency market.
Although cryptocurrency is not like stocks, it does not operate like stock markets. Many cryptocurrency investment strategies that are based on traditional definitions of market share and capitalization, volatility, trading volume, and volatility are flawed. Incorrect figures can lead to misunderstandings of cryptocurrency adoption and valuation, which creates a false perception among investors and media about cryptocurrencies like Bitcoin (BTC).
The first major difference between BTC and equities is that the vast majority of BTC’s market value comes from speculation about future adoption. Today, BTC is being used as practical money and as a store of value in countries by a few million users.
BTC is already useful and superior to government-issued money in countries suffering from hyperinflation, such as Venezuela and Zimbabwe. BTC is also used to circumvent currency controls in China and India.
Even in these cases, BTC competes with fewer legal alternatives due to lack of ecosystem adoption and government bans. In developed countries, BTC is only used by its most devoted followers, as the traditional financial system is still much easier to use.
The number of BTC uses is limited, but this is not the case. Future plans for BTC will see it complement assets like precious metals and fiat currencies like the dollar. BTC’s current value is largely based on speculation about its future use as a payment network.
Rosales points out that there is very little evidence for investors to predict BTC’s future value. There are many possibilities for BTC to fail completely, become a viable alternative in certain use cases, supplementing gold and dollars, or even becoming the new global reserve currency.
BTC’s daily trading volume is one sign of uncertainty. BTC’s daily volume was $36 billion at a valuation $126 billion. That is about 10%. Apple’s volume is approximately $6.2 billion, based on a valuation of $1.17 Trillion.
BTC is much more volatile than stocks. BTC is more volatile than stocks, with more than ten-fold volatility. Virtually all non-fixed cryptocurrencies can be just as volatile as BTC. Apple stock is held by people because of its history of success and loyal customers. BTC holders can speculate about future adoption and price growth.
Another important difference between crypto and traditional markets is the size of their order books. “A traditional stock like Microsoft is traded on a single exchange, with tens of millions of shares available to trade daily from many thousands of buyers and sellers,” Rosales asserts. “As a result, stock exchanges like NYSE and NASDAQ have minimal slippage, can efficiently process large orders and current market pricing.”
BTC owners, on the other hand, hold most of their assets in offline wallets, with only a small percentage in vulnerable markets (which are often hacked, defrauded, etc.). As a result, a million-dollar BTC order can have a major effect on a given exchange, with a ripple effect on other exchanges.
The third important difference between crypto and traditional securities is the ratio of investment cost to market capitalization. The total value of a corporation’s stock is based on investors’ belief in its potential to generate profits in the future. This ability to earn profits is due to the money invested in buying its shares.
“We have no way of tracking the total amount of fiat currency (dollars) spent to buy that BTC, but we know exactly how much profit (in BTC) miners have made from mining BTC,” Rosales explains. “BTC mining is a competitive market process, and profit margins are slim to nonexistent, so we can assume that most of the BTC minted were exchanged for fiat (dollars) to pay expenses, such as the purchase of mining hardware, and electricity.”
If BTC miners sold BTC the same day they mined it to pay for operating expenses, they would have earned $5.3 billion. This is 4% of BTC’s market capitalization.
A meaningful assessment of BTC’s value lies in understanding how ready its ecosystem is to be adopted institutionally and by consumers. The ecosystem is still extremely immature. The tools are not ready for a typical consumer, but this is rapidly changing and the necessary field is being prepared for mass consumer adoption.