We all can agree 2018 was not the best year for the cryptocurrency market, with what seemed like the occasional 90% correction sweeping in to eliminate the massive gains from 2017. In Q1 of 2018, cryptocurrency entered a massive bear market in early January and global stock markets struggled to close out the first quarter strongly. However, stock markets that suffered losses, such as the S&P500, in Q1 were able to recover and prosper as the year continued. Quarter 3 of 2018 was where the tides officially turned and global stock markets transitioned into a bear market. During this period of time, the cryptocurrency market struggled as well but there were periods of stability that seemed to be a ray of hope for the crypto community. Both markets made small rebounds at the near end of December, prompting investors and consumers alike to watch and wonder what 2019 holds in store for the stock market and the cryptocurrency market. Astute investors and market observers are also questioning the correlation between both markets as potential, key indicators for economic downturn point towards a slumping global economy in the future.
IS THERE A NOTABLE CORRELATION?
Define ‘notable’. There is not a strong positive or negative correlation between the stock market and cryptocurrency market according to data collected by Blockforce Capital of Bloomberg. The data collected from January 2015 to October 2018 shows an insignificant correlation, however, what is notable is that there is a change in correlation three times over this period of analysis.
With no significant correlation identifiable, a market observer trying to predict how these markets will react to one another in times of economic growth or downturn should evaluate how they compare against one another. Let’s examine some of the bigger picture characteristics of each type of market:
Stock Markets: Global stock markets have plenty of variety when it comes to asset types. Regular company stocks, index funds, exchange traded funds, and futures make up just some of the options you can purchase through any major stock market. It is important to note, currencies are not usually available through stock markets as these are reserved for the foreign exchange market.
Cryptocurrency Market: When the cryptocurrency market originated, it truly was a currency market. Comprised of coins which represent digital currencies, the cryptocurrency market is more similar to a foreign exchange market in that regard. However, as the crypto market has grown rapidly over the last 3 years, the presence of alternate (alt) coins and most recently stable coins have begun to flood the market with coins that are much more than just a currency. Many of these coins can be viewed as a stock share for a blockchain company, with additional purchasing power and utility. Initial Coin Offerings also helped to propel coins from something that resembled a currency into more of an equity asset.
Big Takeaway: While the cryptocurrency market does have a wide range of coins that provide different utility features, it does not compare with the stock market’s variety of asset classes. The crypto market asset blend consists of traditional currencies, coins that resemble stock shares with added utility, and other unique or hybrid coins such as stable coins. Interestingly enough, you can now trade cryptocurrency derived assets on certain stock exchanges.
PROFIT OPPORTUNITY, LOSS POTENTIAL & VOLATILITY
Stock Markets: Assets in stock markets are traditionally safer, less volatile assets when compared to the cryptocurrency market. As an investor, you usually will need a longer time period to turn a profit over with patience as a key trading characteristic. There are leveraged funds and assets with greater volatility for investors who are looking to turn over bigger profits in shorter times, albeit accepting they can reap proportional losses if their investment calculations are wrong.
Cryptocurrency Market: Volatility is not a word to be shy to use when it comes to cryptocurrency. As we have seen in 2017, incredible profit opportunities can be made in the crypto market and as we have seen in 2018, incredible losses can also occur. The cryptocurrency market is notoriously one of the most volatile trading networks with double and triple digit swings common daily and weekly . In 2018, the world witnessed the stable coin revolution to counteract the volatility synonymous with cryptocurrency.
Big Takeaways: While the stock market is not the most risk averse market for your portfolio, it is much less risky than the cryptocurrency market. Both markets present unique opportunities to investors when it comes to asset types; stock markets exhibits significantly less volatility compared to the crypto market, making it a better candidate for patient investors who have their eyes on a long term capital gain. Conversely, the cryptocurrency market is comprised of assets that can deliver big gains in short time periods, and now stable coins that can help preserve value.
SUPPLY, DEMAND & ACCESS
Stock Market: Stock shares are issued by companies with no cap imposed. This creates a degree of predictability when it comes to demand; when a company wants to raise capital or sees the demand from the market, they can create more stock shares. Access to stock markets are also limited to certain hours (usually 10AM to 4PM) and to the country of origin. Simply put, there are some time and regional stipulations when it comes to conduction transactions through a stock market. Lastly, in nearly every scenario, one will need a bank account to access the stock market.
Cryptocurrency Market: Many of the coins traded on the cryptocurrency market have a predetermined cap imposed or a predetermined mining termination date. Resources with limited supply derive a portion of their value from scarcity; the predetermined caps set on coins such as Bitcoin (capped at 21 Million coins) creates demand for these assets. Ease of access to the cryptocurrency market is greater when compared to the stock market due to the fact it is live and operating 24 hours a day, 7 days a week, 365 days a year. Because the crypto market is not tied to one country, there are significantly less regional inhibitors to investing and more opportunity to invest globally. Lastly, consumers do not necessarily need a bank account to enter into the cryptocurrency market which allows millions of people worldwide a degree of access they would not have in the stock market.
Big Takeaways: The supply and demand relationships that exist in the stock market and crypto market are not necessarily opposite, but they are different. Access to the cryptocurrency market is far greater than access to stock markets. Because there is a decentralized aspect to the crypto market, barriers to entry are diminished.
SECURITY & MARKET MANIPULATION
Stock Market: Global stock markets handle trillions of dollars of volume per day, are highly regulated, and therefore have some of the strictest security policies. Advanced Know Your Client (KYC) and Customer Identification Procedures (CIP) protocols for stock markets are prevalent and quintessential to investor security. The highly regulated nature of stock markets makes it difficult for market manipulation although it is not entirely eliminated.
Cryptocurrency Market: Many cryptocurrency exchanges now have security protocols up to par with other financial institutions. However, due to the inherit anonymity that cryptocurrency was built around, there are security challenges currently present in the market. From an investor or user standpoint, vetting reputable and legitimate crypto exchanges is becoming easier as the market takes baby steps towards implementing regulation. When it comes to market manipulation, the unregulated nature of the cryptocurrency market makes it more susceptible to individuals or groups known to heavily influence price movement up and down.
Big Takeaways: Compared to the crypto market, the stock market has better security protocols in place to protect investor interests. Thorough regulation of the stock market also helps to reduce potential market manipulation and illicit activity that can sometimes occur within the cryptocurrency market.
BRIDGING THE GAP
As the cryptocurrency market continues to innovate and grow in the near future, regulatory influence will as well. As it stands now, several state authorities and governmental agencies have taken strides to gradually implement better security protocols. Global initiatives seeking to find a balance between decentralization and accountable oversight for cryptocurrency will pave the way for safer investing and institutional adoption.
As the cryptocurrency community continues to work with these authorities to enhance the market’s overall security framework, we too should keep an open mind to reasonable regulation. Blockchain and cryptocurrency companies who are making efforts to incorporate KYC and CIP protocols into their business practices will become market leaders as the utility token market grows to accommodate more advanced security demands.
X8 AG takes the security of our investors seriously and we understand the importance as well as the need for moderate regulation when it comes to the overall success of cryptocurrency. The X8 ICO was conducted with extremely strict KYC & AML protocols, created by FINMA. X8 AG will continue to integrate the highest level of these standards into all facets of our business operations moving forward in 2019.
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