Crypto Trading Vs. Stock Trading: How Are They Different?

crypto trading vs stock trading
Shutterstock Licensed Photo - By Iaremenko Sergii

When it comes to crypto trading vs. stock trading, are they different from each other? Most cryptocurrency newbies confuse trading on the cryptocurrency exchange with stock trading. To be fair, the only similarity between cryptocurrency trading and stock trading is the word trading’. The following are the differences between these two types of trading:

Insider Trading Is Real

Every asset is prone to insider trading. In stocks, insider information such as financial statements and minutes to meetings could be used unfairly by insiders such as company executives. The same thing applies to cryptocurrencies where large holders, issuing companies, and mining pools are some of the insiders. Since they are unfairly privy to the latest information, insiders may sell or buy based on whether they look forward to selloffs or rallies.

When considering how to prevent unfair trading practices by insiders, this informational asymmetry needs to be regulated. If not, outsiders will be discouraged from trading. Who wants to lose his or her money, anyway? Overall, insider trading is not good for the market. All it does is push investors to the assets where they can still trade fairly.

In the stock market, there are strict laws and regulations against insider trading. The system may not be perfect but it ensures that insiders are able to maintain trading discipline. Any unfair trading practices attract punishment in the form of profit repatriation, severe fines, jail time, and reputational damage.

That cannot be said about cryptocurrency trading which remains unregulated despite growing rapidly in recent years. Besides, many altcoin companies and exchanges are based outside the US in Singapore, Switzerland, and other countries. Cryptocurrency exchanges rarely ask for the national IDs and names of traders. Just how can they track and punish fraudulent trading? Even where suspicious activities are detected, they are rarely reported to the authorities. As a result, there’s just isn’t enough data to help governments know what’s legal and what’s not.

Lack of Deposit or Security Insurance

When you buy stocks from a US broker, you are entitled to stocks and cash insurance from SIPC and FDIC, respectively. Each of these amounts to $500,000. If your deposits with the brokerage business are blown to ashes, you will get a $500,000 government reimbursement.

Nothing like that is true about cryptocurrency trading. Of all the cryptocurrency exchanges, only Gemini and Coinbase have some kind of cash insurance. The US is yet to recognize cryptocurrencies and, therefore, offers no insurance security through SIPC.

Lack of Revenue Backing

Stocks are traded publicly and are backed by asset-holding and revenue-generating companies. Cryptocurrencies and related tokens are issued almost out of thin air.

Take WeTrust, a company that’s yet to release any revenue, user base, and tangible products figures since its founding in 2016. That’s despite the company capping at $100 million and more by promising investors a product ecosystem, in a pre-sale. On that basis, no one can hold WeTrust accountable for unfulfilled promises. It could close shop and go with investors finances without a warning and nothing can be done to it. In the stock market, entry requirements are so strict that this cannot happen. No wonder there is so much trading discipline.

Permanent Loss Is Always a Possibility

Cryptocurrency exchanges operate exclusively online thus exposing investors to the risk of permanently losing their investments to hackers. Cryptocurrency transactions are irreversible and investors have no legal recourse. If you sue the exchange, it could declare bankruptcy and leave you with huge losses. In 2017, cryptocurrency investors lost over $150 million. Given the underreporting of these cases, the actual losses could be more.

Although stocks are also affected by scams and phishing, deposits and stocks never disappear into thin air. After all, the stolen money can actually be reversed. You can have confidence that no such case of permanent loss of stocks has been reported recently.

Cross-Exchange Price Inconsistency and Lack of Order Protection

In the stock market, there are guarantees from the SEC that orders will be filled by the best bid across all exchanges. Cryptocurrency exchanges have no such guarantees. After all, they are not legally bound to match or improve the prices. That’s why you should select a cryptocurrency exchange carefully.

Clearly, governments across the world have put in place strict laws to regulate stock trading and protect investors. The independent nature of cryptocurrencies makes it hard for any country to put in place regulations. Thus, investing in cryptocurrencies is a high-risk affair where you could lose it all.