The new wave of cryptocurrency since the start of 2017 has taken the world by storm. With the creation of the 1st cryptocurrency Bitcoin in 2009, the world was introduced to the idea of digital currency. The blockchain technology backed currency remained unknown to many until the year 2016-17 when the prices of the currencies were stable, but as soon as the year 2017 reached the mid-period, the prices of cryptocurrency especially the Bitcoin started multiplying and jumped from $900 to nearly $20,000. As the phenomenon of the rise in bitcoin prices started evolving, the purchase of the currency increased too, which resulted in many Options and Future exchanges including digital currency for trade.
Following the events, there have repeatedly been seen the threads of questions asking how the Cryptocurrency trading is different from the forex trading on platforms like Quora and Yahoo urged Fuad Ahmed, a currency trading expert to clarify the question for his readers. In the article below, he is going to explain how cryptocurrency can be traded as equity or forex and what are main differences between the media of trade.
He is of the view that many newbies to cryptocurrency trading believe the method of investing in a cryptocurrency and buying it is same as purchasing stocks online and trading them. Fuad Ahmed in this article will list all the differences and similarities between the forex and cryptocurrency trading.
Unmitigated exposure to insider trading and pump and dump schemes
Exposure to Insider and Outsider Trading
All the assets have a particular set of information synchronized with them from the inside and outside. If we talk about stocks, the insiders in it are people that enjoy the executive status and possess mutual funds and have material, these insiders also avail themselves of the advantage over the outsiders that do not have access to the latest financial developments, boardroom meetings etc. While in cryptocurrencies, the insiders are people like the executives of the companies carrying cryptocurrency tokens, mining pools and large stakeholders like Whales. No matter how much assets one possesses, it’s the access to critical information that’s granted first to the insider than to an outsider. This gives them the opportunity to buy before the rallies and sell before the selloffs.
Fuad Ahmed suggests that only if you are an insider, this asymmetry of information can prove to be beneficial when unregulated, as it usually favors the insider over the other participants. This action, in the long run, proves to be really discouraging for the outsiders to make an investment, as they are reluctant to take the risk and like to avoid all the possibilities of losing the money. Therefore, the unregulated insider trading takes a toll, it leaves only the insiders to dominate the market and takes away the chances from others to invest there, this leads to others opting for different assets and promote fair trading.
This is the reason that stocks keep strict trading laws and procedures for the protection of outsider traders. The system is imperfect, but there are laws that can reprimand insiders that conduct a trade on the material non-public information. On the other hand, in cryptocurrencies, there are no laws that can help or protect the outsider. The reason for this is simply that the regulations have yet not been developed in many states, also many cryptocurrencies operate in a specific region, and in others, the exchanges do not even gather proper identity information from the trader. The KYC (Know Your Customer) makes it easy for many exchanges to track the buyer’s history, this also helps them detect any malicious activity that takes place as the cryptocurrency which decentralized does not have its data stored with the government.
No Deposit or Security Insurance
When you purchase stocks from any licensed US broker/dealer, there’s an insurance of the cash and stock of up to $500,000 which is given to the customer from SIPC. This is a guarantee that in case the brokerage firm is out of business or goes bankrupt, the government takes responsibility and reimburses the loss and give stock investors the relaxation they want.
Cryptocurrency exchanges, on the contrary, give no insurance of the asset or cash invested in it. The only exception that’s being made is by the Coinbase and Gemini, which ensure the deposit of cash.
Cryptocurrencies in many countries aren’t even considered as legal entities and the security insurance policies aren’t applicable to them, this gives cryptocurrencies a vulnerable status. The investors of cryptocurrency can also lose all the investment they have put in it without the insurance from the government.
No backing of the revenue, asset or business model
The cryptocurrencies and tokens over the period of last few years have been created as a test and not without much pre-thought by their developers, while the stocks that are publicly traded are owned and backed by the companies that generate revenue and assets.
Many companies haven’t released any figures about the revenue or their user base, and still had some ranging a market cap of more than a $100 million. This mechanism doesn’t guarantee investors a safe return of the profit, nor it assures them that the company is going to sustain its position. This can be really disturbing for some traders as no matter how much aware they are of the risks present in a trade, they still need some security about the assets they are trading which isn’t given in cryptocurrency in most cases.
Risk of a permanent loss
The major problem with cryptocurrency is that the stealth of a private key of the digital currency can lead to the permanent loss of your money. The withdrawal of funds or transactions are irreversible in cryptocurrency as it is backed by blockchain, the loss of data and money can be permanent. In case of a loss, the investor cannot file a suit against the exchange, as the currency that’s the subject here, is unregulated and the exchange can bail out by claiming that it has gone bankrupt.
So the security concerns regarding the cryptocurrency wallets and exchanges are very high. If the track of high profile hacks that have happened in history is kept, then we find out that more than $150 million has been lost or stolen by the hackers since the previous year 2017. These are the only reported losses, the actual number may differ and might be higher.
As the hacking is common with cryptocurrency, the cases of scams and phishing are also reported with the stocks and deposits, the only difference is that the stocks cannot disappear permanently. There has never been reported a case where a registered stockbroker lost all the records and customers funds permanently.
The lack of price consistency across exchange
The stocks guarantee a trader through SEC, that the order limit won’t be filled by a bad or worse price and the best bid will with all possibility go about all the exchanges.
The cryptocurrency, on the other hand, has only the best bid offer ruling over all the places and the exchanges aren’t legally bound to match the price or improve it. Therefore, if trading cryptocurrencies its important to pick the good or the best exchange