Comparative Analysis of Cryptocurrency Market vs Traditional Stock Market

There’s been plenty of hype in the financial markets over the last 12-months, with the U.S and Asian equity markets rallying to record highs, investors in awe of the Hang Seng’s 41.8% 12-month return and the NASDAQ, S&P500 and Dow Jones’s record-breaking runs that have continued into the New Year.

The global equity markets are a mature asset class, particularly those in the West, with the direction of the markets being considered a barometer to the state’s macroeconomic environment as the largest proportion of index components’ earnings are derived, whether domestic or from overseas.

In addition to the national benchmarks, there are numerous blends (Indices by category) that have been created by index providers over the years that also provide direction for investors across the globe.

Within the equity markets, the inclusion of a company’s stock has to meet certain criteria, with shares being sold by way of an initial public offering. Based on the market sentiment towards the Company, its management, debt profile and earnings outlook, the stock will then go public at below or above the IPO price, with market conditions on the day of the IPO also a factor to consider.

There is a plethora of information readily available on each and every company listed on the major exchanges as it is mandatory for companies to also publish their audited financials, so there are no transparency issues and fraudulent cases are few and far between.

For the cryptomarkets, the principal is similar, while there are many differences in the way in which the two markets function.

Companies and projects looking to raise funds and/or launch in the cryptomarkets do so by way of an initial coin offering (‘ICO’). There has been plenty of press on initial coin offerings of late and, in spite of news hitting the wires that at least 10% of total funds raised through ICOs have been stolen, the market continues to expand at a rapid pace.

While investment banks continue to be mandated with IPOs, smaller companies don’t meet the minimum criteria to be listed on a major exchange, or a minor one for that matter, with most companies entering the cryptomarkets being startups.

Historically, smaller companies and startups would and, in some cases, still obtain funding from venture capitalists. While VCs are able to provide the necessary liquidity to support growth and expansion, a laundry list of requirements accompanied the Dollars.

In the ICO market, the management teams are just required to prepare a ‘White Paper’, make appropriate efforts in marketing in order to make investors aware of the offering and the details of the ICO and then launch the ICO that generally lasts for 4-weeks. For fundraisers, the costs associated are minimum, there are no regulatory hoops to jump over and the token price, equivalent to the stock price, can be fixed to a Dollar value or in some cases an Ethereum or Bitcoin Value.

How the Company then decides to spend the money to deliver on its obligations is up to the management of the company and the developers as investors, at present, having very little say in terms of taking project’s decision.

Basic Differences and Similarities between

Investors
Few would argue that investors within the cryptocurrency markets are there largely for speculative reasons. While not wanting to belittle those who have taken the time to read through white papers and do the research, many have just jumped on the bandwagon and have gone for the ride.

Admittedly, those who went into the cryptomarkets any time before December of last year alone would have been overjoyed and, well if it was at some point in 2016, then overjoyed just doesn’t cut it.

The cryptomarkets have made millionaires and billionaires, and initial investments have been negligible at best. One just needs to consider the returns seen across the cryptomarkets since December 2016, with more than 20,000% gains not uncommon.

In stark contrast, investors in the global equity markets are certainly more risk-averse, though it is a strange phenomenon. Investing $1m in the global equity markets could put at risk as much as 15-20% of the capital, in the event of a relatively minor correction.

Investing even just $10,000 in Bitcoin on 31st December 2016, equivalent to just1% of the equity stake, which comes and goes almost weekly in the global equity markets, would have made more than $1m. Obviously, it applies to the other direction as well. Losses and higher risk are much more significant when choosing the crypto market.

One does, therefore, question the logic and wonder which investor has been the savvier, with a large proportion of cryptomarket investors new to the game, driven by the noise surrounding the bubble that never bursts.

Such opportunities come around once in a decade or even two. The dot.com bubble was almost 17-years ago. Most investors in the global equity markets will have felt the pain of the dot.com bubble and will have contributed to the lack of interest in the cryptomarkets and, throw in the Global Financial Crisis, then for many, it has been a case of better the devil you know. The Dot.com bubble had expanded to a whopping $6.7tn before it blew…

Financial markets investors are divided to two as some enter the crypto markets as an opportunity to earn passive profits while other reject the system and hold on to the traditional equity markets.

Public Sentiment
For now, the public is looking for the next cryptocurrency rally, with the cryptomarkets have been in limbo in recent weeks. The belief is there and there’s plenty of chatter. Those who missed out are hoping for redemption, with the cryptocurrencies having fallen back from December and early January record highs.

The more seasoned investor is ever more cautious on entering the cryptomarkets than before and 10,000% returns may not be so easy to come by, so to make that magic $1m, they might need to throw in $20,000 or $30,000. That’s quite a sum on an investment that has no basis to go in any direction other than speculatively driven supply and demand dynamics.

Much like the Lottery, you have to be ‘in it to win it’ and, while some will buy a lotto ticket dreaming of getting the winning numbers, there are far more than pass up the opportunity, as has been the case with the cryptomarket.

If the cryptomarkets need to get to stratospheric heights akin to the $6.7tn dot.com bubble before bursting, then there’s a long way to go and ignorance may become bliss.

Future of cryptocurrency market and traditional stock market

On paper, there is no reason why the two markets are not able to co-exist looking ahead. After all, the size of the companies are vastly different and the nature and influences of the companies are also worlds apart.

As of today, it would be almost unthinkable to imagine that the traditional stock market, as we know it today, can merge with the cryptocurrency market and ultimately see an end to the success of the Dow Jones and the FTSE100.

Systems are archaic and when considering the size of the global financial markets, relative to the cryptocurrency market, well, the cryptomarket pales in comparison and is likely to do so for many years to come, exponential gains or not.

Investor profiles are also significantly different and, until the entire cryptomarket falls under the purview of regulators the world over, its size will continue to remain insignificant relative to the combined market capitalizations of the global equity markets.

To put it into perspective, the market cap of the cryptomarket is just $566,480bn as at the time of writing. The market capitalization of the global stock market has risen from a global financial crisis low $40tn to $100tn as at the end of 2017. That’s quite a substantial difference to the cryptomarkets $0.56tn market cap.

Will Cryptocurrency market become new Wall Street?

The issue currently facing the cryptomarket is the fact that there are a total of 1,494 cryptocurrencies in existence and, while the market cap may have reached $0.56tn in just a matter of years, Bitcoin accounts for 34% of the market’s total market cap, with Bitcoin’s market cap standing at $194bn, closely followed by Ethereum at $108.8bn. Therefore the cryptocurrency market is still far from being a major financial market.

In fact, removing the top 5 cryptocurrencies by market cap leaves the market cap for the remaining 1,489 cryptocurrencies at just $0.170tn.

KODAK may test the theory, however, as it launches an ICO at the end of this month in order to incorporate blockchain technology into its product offering. It will be the first dual listing of a listed company on the NYSE that will also have a cryptocurrency.

How KODAK ICO performs and where investor profiles between the two markets become muddied remains to be seen, but it could certainly be the start of a lengthy transition from one side to the other.

If blockchain tech is here to stay, then KODAK isn’t going to be alone in its endeavours but investors will need to begin considering the product or service capabilities, with the speculative nature of investment likely to die a death long before the cryptomarket is able to go mainstream. In that case, the crypto market, in particular, the ICO market, equipped with the blockchain technology can be the door for a new rival for the IPO’s and the traditional stock markets.

Disclaimer: This article is courtesy of Bob Mason from FXEmpire.com. It should NOT be viewed as an investment advice by EtherWorld. Readers are suggested to do their research before investing into any project.

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