Asset Trading: Bitcoin vs. Stocks

bitcoin-logo-on-black-binary-background

Bitcoin Logo on a Black Binary Background

Over the past 18 months there has been a frenzy of interest in Bitcoin because of the digital asset’s meteoric rise in price. In March of 2017, Bitcoin was valued around $1200. Fast forward to December of 2017 and the price shot up to $20,000. That is an increase of around %1,700! In addition, many other digital assets rose in value which further ignited interest and rallied people, who knew little about digital currencies, to open up accounts on digital currency exchanges throughout the world. Is all this smart and making sense for retail traders? Let’s take a look at how Bitcoin trading stacks up against stock trading.

Let’s be clear here, trading is different from investing. A trader will buy an asset with the expectation of selling it or trading it in the near future. How you define near future varies, but it usually means holding (no, NOT hodling) for anywhere from a few months to a few minutes. Investors, on the other hand, usually plan to hold (or hodl) a position or asset for over a year or several years. The reasons traders do this varies from personal financial situations to appetite for risk. Another thing to keep in mind, is this article focuses on retail traders. You know, the “average joe” who may have a few thousand dollars to trade versus the institutional trader who is part of a team, usually works for a big company and has hundreds of thousands, if not millions of dollars to trade with. So no whales here.

Insurance

Bitcoin trading: There are now exchanges that will insure your money if something happens to the exchange or your account, but protection varies from exchange to exchange. For instance, some exchanges will not protect you if your account gets hacked through your personal computer rather than through the exchange’s servers. Also, the amount of coverage can vary from thousands of dollars to millions.

Stock trading: Stocks have been insured for years at various levels. Your broker will insure your funds as will the governments regulating the exchanges and finances. Since this has been going on for hundreds of years there is little that could happen to make a stock trader lose their money out side of making a horrible trade.

At its inception, Bitcoin had no protection. You risked losing your money if you even sent it to the wrong Bitcoin address let alone had your computer destroyed or damaged. Also, having Bitcoin on your connected computer put it at risk of theft via hackers. Although that has changed, not all exchanges offer insurance or complete coverage. So the advantage here belongs to stock trading. The protections are tried and true, having been tested time and time again, and are fairly uniform and standardized.

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A Bitcoin Chart – Photo by: John Makos

Insider trading

Bitcoin trading: One area where Bitcoin trading shows quite a lot of risk is in price manipulation. Since Bitcoin trading is unregulated there is nothing stopping “whales” or traders with big wallets (we’re talking millions here) from manipulating the price. It is easy for a whale to slowly accumulate shares, wait and hold, then buy massive amounts to drive prices up, only to sell a massive amount when prices reach their target. They can also do the opposite which would cause a huge change in price and volume. Another tactic is spoofing which is illegal in stock trading. This is basically setting buy or sell orders that they never plan to fill in order to manipulate prices. There is also nothing that prevents groups from getting together and manipulating the price via ads and transactions.

Stock trading: Since stock trading has been around for so long and is highly regulated, there are only limited ways traders can get away with insider trading. Stocks are not completely invulnerable to insider trading, but trading that has a significant impact on pricing can easily be inspected since transparency is so important in stock trading.

When it comes to insider trading, both Bitcoin trading and stock trading are vulnerable, but the advantage here favors stock trading. Because of the lack of regulation around Bitcoin trading it is more susceptible to manipulation, but stock trading will always be vulnerable to those with insider knowledge and tons of cash. In fact just earlier this year Carl Icahn was accused by the public and the media of insider trading when he dumped shares of steel right before President Trump announced tariffs.

Profit

Bitcoin trading: As mentioned above, when Bitcoin began its meteoric rise, people became interested in it in order to earn a profit. As an asset, it has a high volatility which excites asset traders. Where can you find an asset that regularly has price swings of 10% or more on a daily or weekly basis? It is quite difficult to find that in the stock market out side of speculative penny stocks. Just the past few months alone, Bitcoin has been trading in a range from $6000 to $8000. That’s a 30% range.

Stock trading: There are many stocks with high volatility, but very few have the massive moves that Bitcoin prices have. Sure it is possible to get 5% moves maybe on a weekly basis, but the larger price swings coupled with the high frequency is something Bitcoin has in spades.

When it comes to making a profit from trading, volatility is what traders are looking for. The stock market has a lot to choose from, but very few stocks will have the type of price movement with the type of frequency that Bitcoin has. When it comes to profit, Bitcoin definitely has the advantage.

Trading hours

Bitcoin trading: One of the best features about Bitcoin trading, and this coin has two sides, is that you can trade 24 hours a day seven days a week. Now, this also has a downside because you have to be aware of the price at all times. So you may get a price alert at four in the morning because Asian traders are making Bitcoin move. So some may find that daunting, but it is an advantage. You can move your funds whenever you want. That freedom provides assurance that you can acquire shares or divest interest whenever you want.

Stock trading: Stock exchanges have set hours (in America at least). In the USA, regular trading hours are 9:30 a.m. ET to 4:00 p.m. ET. There are extended trading hours which range from 4:00 a.m. ET to 8:00 p.m. ET. As you can see that is not quite 24 hours. How does this affect traders? Well if something happens out side of trading hours – let’s say news hits about a company – you can’t sell or buy your asset. If you don’t have extended hour trading privileges, you will miss some action. This can result in huge losses or missed opportunities.

So with asset trading hours, the advantage goes to Bitcoin trading. You can trade whenever you want, including weekends. This provides a huge amount of freedom and a ton of assurance knowing you can buy or sell your digital asset at any time.

Fees

Bitcoin trading: It seems like there are fees fro every little thing we do. Bitcoin trading is no exception. There are fees to conduct transactions. These are used to pay Bitcoin miners to encourage and provide incentive for mining more coins. In addition, an exchange will usually charges fees to handle or process your transaction. This will help cover their business costs for providing a trading platform. Depending on the amount and type of transaction, the fees can be minimal to quite large.

Stock trading: One of the barriers to stock trading are the fees. With most brokerages, there are a slew of fees, many of which have nothing to do with a transaction and more to do with regulation or data. There are transaction fees which are usually based on the amount of shares sold. There are data fees for the data feeds which give you price and book (a more detailed look at orders). There are fees for extended trading hours. There are margin fees and fees for borrowing to short a stock. Also, there are fees to have a broker place an order.

Though both trading classes have fees, the win clearly goes to Bitcoin trading. The low amount of fees makes it more attractive. The fees surrounding Bitcoin trading are fewer and they are more clear and simple. This was actually one of the incentives for creating Bitcoin – to get your funds out of the hands of big banks so you no longer have to be held hostage to fees and account minimums.

Overall Bitcoin trading has come a long way despite there still being a lot to be concerned with. However, stock trading is not without risk. Is it safer to trade Apple versus Bitcoin? Yes. Can you make as much money trading Apple versus Bitcoin? Not really. Another thing is Bitcoin trading provides a lot more flexibility. You can trade on a local exchange anonymously or you can join a larger exchange with insurance and verification processes. Bitcoin’s flexibility, global reach, wider acceptance and volatility really make it an attractive vehicle for profitable trading.

Author: Saul DeLuzoro

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