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Is the stock market converging on the crypto market?

4 min read

Critics often describe investments in cryptocurrencies as risky. High volatility, insufficient regulation, hacker attacks and lost keys are the horror scenarios that are often invoked and can lead to high losses. Netflix’s share price has fallen more than 27 percent yesterday. We wonder how different are traditional public companies and crypto stocks anyway?

Volatility: Only invest money that you don’t need

Volatility is a key figure from the financial world and describes the intensity of price fluctuations. Cryptocurrencies are considered highly volatile compared to stocks. There are several reasons for this. Among other things, in contrast to the stock market, the industry is still very young. The first stock exchange, for example, opened in Amsterdam in 1611. Cryptocurrencies, on the other hand, have only been around since 2009. Due to the young age of the industry, the uncertainty is much higher, which is reflected in the high volatility on the crypto market. Panic selling by investors can therefore be observed more often. BTC whales are increasingly amplifying the volatility phenomenon. If huge amounts of cryptocurrencies move, the market perceives this and reacts to it. But there are also so-called stock market whales on the stock exchange who buy large shares in companies.

The crypto industry is aware of the problem and is constantly working to ensure that the market is no longer subject to such strong fluctuations. Because most cryptocurrencies are not backed by physical assets, with the exception of stablecoins. They are linked to a fiat currency or to the price of gold and replicate its price exactly. This is how you can combat volatility and support other cryptocurrencies with the help of stablecoins.

With time and the associated increasing acceptance in society, the markets in terms of volatility are probably moving closer and closer together and are all the more similar. Our market expert Stefan Lübeck says that even very stable and large stock corporations repeatedly have highly volatile phases. This was also the case recently with Netflix.

Currently, the volatility of classic technology growth stocks is also increasing significantly. Poor quarterly results paired with failed analysts’ expectations cause significant price falls for formerly celebrated industry leaders. The sales and earnings expectations in no way reflect the optimistic company valuations of many technology stocks. Significantly missed growth forecasts result in stock revaluations, which is why investors are increasingly selling off former favorites.

BTC-ECHO market expert Stefan Lübeck

Regulation: curse or blessing?

Most stock markets are subject to government supervision that provides security. It is precisely this central regulation that is a thorn in the side of most fans of decentralized technologies, and the crypto industry is nowhere near as regulated as the stock market.

However, this regulation is both a curse and a blessing. On the one hand, it protects investors and, on the other hand, it can strengthen trust in the industry and thus acceptance. With the Markets in Crypto Assets (MiCA) the EU intends to incorporate regulations relating to cryptocurrencies into European law very soon.

Diversification: No total loss

Most portfolios invest in different stocks from different corners of the world and from different industries. If you diversify your portfolio, you are no longer exposed to the risk of total loss. The strength of one industry offsets the weakness of the other.

Cryptocurrencies have fewer options for diversifying investments than stocks. BTC maximalists don’t like to hear that, but you should never put all of your money in just one coin. Over time, more crypto assets will be added, allowing investors to further diversify here as well. But everything with time.

Personal risk tolerance

In the end, there is no market that is better or worse. It always comes down to personal risk tolerance – or the right instinct, because even stock prices that are actually thought to be stable can correct sharply, Netflix is ​​just the most recent example.

Do I want to make money fast and have some money left over to gamble with? Or do I want to save money in the long term and always put something aside? A diversified stock portfolio can be a safe haven for your excess cash and help you build long-term wealth through stability – just like a well thought-out crypto portfolio. Crypto investments, on the other hand, can lead to short-term high profits or even losses – just like a particularly good (or bad) stock portfolio. Anyone who bought Netflix shares instead of Dogecoin tokens yesterday can be angry – even if that doesn’t fit into the established image of many investors.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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