Price Movement Differences Between Forex, Stocks, And Cryptocurrencies
In order to find out what cryptocurrencies and stocks are similar in, we need to take a closer look at what they both really are. Stocks are simply shares of publicly traded companies in which people can invest or trade with.
Stocks
Most stocks rise in the long-term period but, of course, there are also companies which bankrupt or stagnate. If you want to invest with the lowest risk, buy defensive stocks with high dividend pay-outs or regularly invest in S&P 500 through ETF what would average your entries whether the market is rising or declining and in the adequate time period, you will make money. If you want to make above-average returns, you need to invest in cyclical stocks which outperform defensive stocks during the economic upside.
Cryptocurrencies
Cryptocurrency is a digital currency that uses cryptography for security. Most cryptocurrencies work on blockchain and have a lot of pros and cons, but there are other things going to be discussed here. Officially, the first cryptocurrency, Bitcoin, was created in 2009. However, most people started to hear about cryptocurrencies at the end of 2013 when Bitcoin hit the price of $1 000 for the first time. Then in 2017, when Bitcoin almost got to $20 000. Stocks already exist for several centuries, but cryptocurrencies exist only about a decade. This is probably why most people are still fearful about their future.
There are a lot of factors influencing the volatility of moves of stocks and cryptocurrencies but if we take a look at them through game theory, they are both positive-sum game. Cryptocurrency has a nature of the currency. The goal of cryptocurrencies is an exchange between several parties with low fees and the process should be fast and easy. This is similar to fiat currencies (e.g. Euro, Australian Dollar or British Pound), while price movements of cryptocurrencies are similar to stocks because, in the long-term, they rise. If you want to trade fiat currencies, you can do that in Forex (Foreign Exchange).
Forex
However, Forex is a zero-sum game where one party wins and the other loses. There is always a winner and a loser (exchange of profit and loss at all times). If you were short selling (betting on the decline) Australian Dollar (AUD) in 2018 without leverage, you would make a 10% profit, but your profit is someone else´s loss.
Now I am going to compare fiat currencies, stocks and cryptocurrencies from the value growth perspective, so do not consider any fundamental side of these assets. Whatever you think, there are notorious central banks behind fiat currencies, big companies behind stocks and uncertain but breakthrough technology behind cryptocurrencies.
History in charts
So, there is always something behind those assets and that is the reason why they still work. Even though cryptocurrency is seen as a tool for exchange of money as fiat currency is, in the long-term, it moves as stocks because overtime it increases in value. Let´s take a look at the history of Bitcoin in the chart. As you can see, its price went up from only a few cents to almost $20 000 at the end of 2017.
If you look at the S&P stock index, its long-term trend is also upwards. However, the history of S&P is much longer and thus more trustable because it exists for several decades.
When you look at the chart of Euro versus U.S. Dollar (EUR/USD) you can see that for more than 25 years the exchange rate went only to the low of 0.8400 in the year 2000 and to the high of 1.6000 in 2008 but currently the price is 1.1236. Simply said, fiat currencies are not good for investing but for exchange of money, hedging or trading through CFD, Futures or other derivatives.
If you look at other currency pairs (except exotic currency pairs such as EUR/TRY) like USD/JPY or GBP/USD, they all behave similarly and they all remind the chart of standard deviation. When you think about it, the price always goes strongly up or down but later it always comes back to the mean which I marked in EUR/USD chart and it is approximately around the price of 1.2000. That does not mean you should buy when the price is below 1.2 hoping it will come back…
What is really a cryptocurrency?
People were trying to categorize cryptocurrencies ever since and wondering whether it is a currency or commodity, but thanks to the collected facts, I would call it a hybrid between fiat currency and stock because it has a nature of fiat currency (exchanging), but its long-term up-trend is similar to stocks. If you look at cryptocurrencies from a game theory perspective, people can participate in the growth of a market and they can all make money which is not possible with fiat currencies. Cryptocurrencies are simply a merge of stock and fiat currency. Cryptocurrency has a limited amount of shares like stocks but fiat does not.
So, if you want to invest your money long-term, stocks and cryptocurrencies may be a good choice. However, if you want to speculate or trade, you can do that in any market you can.
Published at Sat, 31 Aug 2019 20:32:59 +0000
Bitcoin Pic Of The Moment
✅ This image from Marco Verch (trendingtopics) is available under Creative Commons 2.0. Please link to the original photo and the license. 📝 License for use outside of the Creative Commons is available by request.
By trendingtopics on 2019-04-11 06:33:07
