Despite Bitcoin’s current correlation with the equity market, Bitcoin will come of age in this financial crisis as it was born for this.
Throughout the history of traditional stock markets, any price movements that do not exceed a 20% loss is considered as a correction. Despite the ongoing coronavirus pandemic, oil price wars and the recent US-China tension, the global market has yet to see a crash in the market prices since the “Black Swan” event on the 18th of March this year, where Dow Jones Industrial (DJI) Average slid more than 50%. Bitcoin has also registered a reducing price volatility of 15% and below, as the cryptocurrency markets anticipate the upcoming Halvening event on May 12. Thus, it is safe to say that there is an ongoing healthy correction occurring in both the traditional and cryptocurrency market in the short term timeline.
The different of valuation
In a recent March interview with Forbes, popular crypto trader and YouTube personality Tone Vays believes that Bitcoin does maintain a correlation with traditional stock markets because they are both “private assets”. He added that the 2018’s Bitcoin bull market may be attributed to the demographic of people who got wealthier and were more willing to speculate on new asset classes like Bitcoin. But he is taking a cautious stance towards the current global economic uncertainty. Many people may not be looking for alternative assets such as Bitcoin to invest in amid the crisis which impacted businesses and individuals worldwide, as Bitcoin is not yet primed to replace cash across the globe given its short 11-year timeline since its creation.
Currently, possible profits generated by the long-standing equity stocks which contain tangible assets of value are backed by legitimate companies and institutions. When compared to cryptocurrency assets, valuation of equity stocks are more predictable with a proven set of mathematical formulae. Although regulations are enforced in the cryptocurrency market since the bull market in 2017, there are still many cryptocurrencies including the forerunning Bitcoin that are not backed by reputable companies and the value is mostly based on hype and speculations. That is not to say that all cryptocurrencies are pure speculative assets. Chainlink, Tezos and Ethereum are some of the good examples of blockchain projects which are supported by big tech companies and managed to obtain a valuation based on their functionality.
Varying level of volatility
According to a recent report from the blockchain analysis firm Chainalysis, Bitcoin’s volatility is increasing given the uncertainty of the coronavirus pandemic. Even with the aid of technical forecasts platforms such as WalletInvestor, the forecast based on machine learning and artificial intelligence may not accurately predict the yearly and even weekly trend of most cryptocurrencies. On the other hand, the matured equity stocks are comparatively easier to predict since their volatility levels depend on a fixed set of internal and external market influence, making analysis possible for the traditional stock market. Therefore, the key factor for the cryptocurrency market to be regarded as a mature market is time.
Despite the uncertainties from the newly emerging cryptocurrency market, cryptocurrencies do appeal to a specific class of investors - those that are high risk-takers often find the cryptocurrency market attract as it tends to outperform at times due to its lower market capitalisation, making it a favored choice for speculators who are out to generate huge profit within a shorter time frame when compared to the traditional stock market. With great risk comes great reward, cryptocurrency is a niche investment which does not react like regular stocks, and thus attracts nearly a third of millennials as the preferred investing option compared to stocks. Despite its reception, it is still simpler to invest in traditional stocks with popular investment apps like Robinhood, the process to trade cryptocurrencies are more complicated because of the preparation required to determine the investability of the crypto. The crypto price is affected by a combination of factors such as hype, technology, token supply and ‘FUD’ which are uniquely different from stock analysis and forecast.
The purpose of stocks and crypto
Before we jump into the financial aspects of cryptocurrencies, we may have to understand the technology behind it - Blockchain. A good analogy would be blockchain's similarity as an oil refinery, which cryptocurrency is a valuable by-product of distilled oil. With the growing popularity of popular blockchains like Ethereum, Stellar Consensus Protocol and Bitcoin, ordinary people can learn how to mint a cryptocurrencies, or merely engage a skilled individual to mint your very own cryptocurrency. Ethereum, by far, is the most popular blockchain which many organisations and individuals are building their blockchain-based applications on, and ERC-20 remains as the most common standard used by ordinary people to create their own cryptocurrency tokens. The same cannot be said for stocks. Since stocks rely on the sale of products and services backed by reputable companies.
Another point to note is the functionality difference between stocks and cryptocurrencies. Stock options are created solely for fundraising purposes, while cryptocurrencies could serve multiple purposes. After a stringent phase of regulatory implementation, cryptocurrencies are now categorised into different classifications such as equity, utility and security tokens. Some tokens can be used as a form of in-app reward, others are traded just like stock equities.
Possibility of frauds in both markets
Stocks operate within a certain framework of rules and mostly undergo yearly audits to determine its eligibility to be traded on the stock market. Because of the highly regulated stock market, it is very unlikely to invest in a fraudulent stock. Despite the declaration of personal information before listing a stock option on the exchange, deceptive practices in the stock market do rarely happen in the past with a few highly publicised stock scams over the past two decades. Thus, while it is nearly impossible to prevent any bad actors from stock scams, investors could protect themselves by diversification of their investment portfolio, which is one of the reasons many have turned to Bitcoin and other altcoins in recent years.
Contrary to popular belief, cryptocurrencies are more susceptible to fraud due to its decentralised and largely unregulated nature. Similar to the traditional stock markets, there are currently in fact many, or to be precise, more than 5400 listed cryptocurrencies in the market. Fortunately, the SEC and other government regulators have noticed the prevailing issue in the increasingly popular cryptocurrency market and are enforcing numerous compliance standards catered to cryptocurrency investing. For instance, many centralised exchanges and payment services are now required to verify the personal information of users through the Know-Your-Customer (KYC) process, just like how traditional stock markets require investors to declare their identity in order to allow them to trade in the market.
However, it is worth noting that the real reason behind the creation of Bitcoin and crypto is decentralisation. Transparency and immutability ensures that transaction data are no longer held by a central authority and is permanently etched onto the blockchain, gradually shifting the financial power back to the people. The philosophy behind Bitcoin has bred a new type of privacy focus not found in the traditional market. For instance, Bitcoin and most crypto are not designed to be anonymous, thus lacking the much needed digital privacy many people are looking for in this digitally-connected world. As a result, there are a handful of third-party privacy tools such as Bitcoin mixers that could possibly help the user to achieve complete anonymity and privacy while trading with Bitcoin.
Bitcoin mixer is a Bitcoin privacy service that users utilise in order to obfuscate their transaction and make it almost impossible for blockchain analysis to track. The Bitcoin mixing service works by randomizing the user’s Bitcoin and returning the same amount of Bitcoins to the user through different Bitcoin addresses assigned by the user. It is useful to anyone who wishes to make their Bitcoin transactions untraceable, since any bad actors will be unable to track the original receiving address of mixed coins through the Bitcoin mixing service. This breaks the transaction trail, offering privacy to users.
Co-existence of both stock and crypto markets
The stock market is already a well-established institution that can dictate the global economies, while the other is still new to the game of the global market. This fundamental knowledge may not justify the future of crypto markets. However, potential use cases of cryptocurrencies far exceeds stocks which are used solely for fundraising. With innovative solutions such as Bitcoin mixers and other intermediary products that could ensure the privacy and anonymity of anyone who trades with Bitcoin. It can be concluded that for the foreseeable future, stock and crypto markets will continue to grow to satisfy different demands of the global market, with cryptocurrencies leaving a far greater influence into the future of asset trading.