How Is Trading Cryptocurrency Different From Stocks and Forex?

Some new traders think investing in cryptocurrencies is similar to buying stocks. Today, we shall explore the differences between trading cryptocurrency through stocks and forex.

Author: Jacob Okonya

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Jacob has been engaged in blockchain technologies, Bitcoin, and fintech. He worked mostly as a blockchain market researcher, fintech journalist, and online forum moderator. Jacob is involved in creating articles and educational content for different project components, explaining how users can utilize the various resources.

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The stocks markets are the largest market in the world. The cryptocurrency market, on the other hand, has a combined market capitalization of more than $136,083,600,469. Both of this two markets run all day and all night all year round and is accessible from every part of the world.

The two markets employ millions of people across the world from traders, developers to other associated utility auxiliary services providers. Entering these market is averagely easy and does not require any specialized training but rather some little researching is essential.

In this article, we shall discuss the major difference between trading cryptocurrency and trading stocks and forex. cryptocurrency is a rather new entrance to the trading world so it should be traded with care.

trading cryptocurrency stocks vs forex

Unmitigated Exposure To Insider Trading in Pump and Dump Schemes

In every asset, there is a significant information difference between insiders and outsiders. In Stocks and forex trading, insiders are people like executives and mutual funds with the material, unfair advantages over outsiders.

Insiders have updated knowledge of latest financials, boardroom meeting minutes and so forth. Meanwhile, in cryptocurrencies, insiders are the executive of the companies behind the cryptocurrency tokens, Mining pools, and whales. Regardless of the asset, insiders have access to critical information sooner than the outsiders. This advantage helps them to make swift decisions to buy before rallies or sell before selloffs.

Stocks Forex Exchanges Have Tough Insider Trading Laws To Protect Outsiders

Although the system isn’t perfect, at least insiders are strongly warned against trading using information from nonpublic sources. The punishment for insider trading activity is jail time, reputational damage, repatriation of profits, and severe fines, which is enough to scare most insiders.

On the other hand, cryptocurrencies have no such laws protecting outsiders. This is major because of the lack of proper regulations. Many altcoin founders and exchanges operate in countries with favorable financial systems like Switzerland and Singapore. Many cryptocurrency exchanges do not collect trader’s information or report suspicious activities to any government regulator.

Trading Cryptocurrency Different From Stocks and Forex

Lack of Custodian Service

When buying stocks with a U.S broker, both the cash and the stocks are insured up to $500,000 each. Cash and stocks in the US are insured by FDIC and SIPC respectively. This implies that if the broker goes out of business and wipes out user deposits, the government would reimburse the trader up the insured amount. This insurance scheme offers a significant peace of mind to stock investors.

Cryptocurrency exchanges, on the other hand, do not provide either cash or asset insurance. However, some exchanges like Coinbase and Gemini do insure cash deposits. The United States does not even treat cryptocurrencies as legal securities yet. This means security insurance like SIPC does not apply.

Not Backed By Any Revenue, Assets, or Business Model

Unlike stocks which are backed by companies that generate some revenue and have assets, cryptocurrencies are not backed by any revenue or assets. In any event when a cryptocurrency company decides the quietly shut its doors, users would be left in little legal resources. Trading in cryptocurrency requires a lot of vigilance on the site of the user since space highly lacks regulations.

Trading Cryptocurrency custodian service

High Risk of Loss of Funds

The private keys protect the cryptocurrency tokens. In any case, if a hacker breaches the cryptocurrency exchange and obtains user private keys, chances of losing money become eminent. Cryptocurrency transactions are not reversible meaning in such events no one will be able to restore your wallet balances. Suing the exchange can’t help much since it can just declare bankruptcy.

Events involving losses of cryptocurrencies from exchanges are far too commons. Figures ranging from $60 million to $600 million has gone missing on different exchanges around the world. Also, scams and phishing also happen with stocks, stocks and deposits can’t just vanish permanently. Any illegal financial transfers in stocks are reversible.

Lack of Price Consistency Across Exchanges & Order Protection

While trading stocks, SEC assures the trader that their limit orders aren’t filling by a worse price than the best offer or best bid across all exchanges. However, with cryptocurrencies, the best bid offer is all over the place.

Exchanges do not have any legal obligation to price match or price improve. As a result of this difference, it is essential for traders to pick good exchanges for trading. You will find the complete reviews on Crypto exchanges on Coinpedia to decide on which one is best for you!

In every developing country, stock trading regulations are strict as per investor protection laws. Cryptocurrency trading, on the other hand, is completely unregulated. The lack of regulation has negative consequences on traders.

To add to this list share your views on the differences between trading stocks and forex from trading cryptocurrencies in the comment section below. Do not forget to follow the discussion on Twitter to gain more trading insights.

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