The stock market shares many similarities with the bitcoin market. In view of this, it is obvious that crypto trading techniques emerged from stock trading principles. Discover what works in both markets.
Many people see bitcoin and the stock markets as very different entities that do not meet nor mix. How true can this be? For starters, bitcoin can be traded for capital gains and the same applies to the stock market. So, if you are going to trade in both markets, you need some fundamental understanding.
How Bitcoin Works
Bitcoin had a market capitalization of just under 100 billion USD as at April 22, 2019. In a period that has seen the devaluation of market values, this could otherwise have been higher. Yet, this valuation places it within the ambit of the top 100 companies on the NYSE.
Bitcoin is both a cryptocurrency and a blockchain technology platform. It emerged as the pacesetter of blockchains when it opened its ledger on January 3, 2009, for public use. As a cryptocurrency, it can be used for value transfer, payments and for remittances.
The attraction of bitcoin to cryptocurrency traders lies in its dominance of the cryptocurrency market. It controls 52 percent of the market capitalization. So, by buying bitcoin, you have the advantage of owning a market leader.
In the marketplace, bitcoin value is determined by the forces of demand and supply. So, whenever overall sentiment shows a positive indication, you can expect a rise in demand and as such, a price increase. On the supply side, the quantum of bitcoin in circulation is fixed and cannot exceed 21 million.
How the Stock Market Works
The stock market is driven by a system of listing of company shares, bonds, and other securities. A daily bidding system is in a place where the day’s opening price will be moderated by the demand and supply forces. Except a company decides to raise new shares or carry out a stock split, its share number is fixed.
Several companies are listed on the stock exchange and this makes it a huge market. However, what drives the price of a company’s stock are largely identifiable factors. When a new market opens for a company, there is a likelihood of a stock appreciation. This is a positive sentiment.
It is also important to identify factors like the strength of competition, government pronouncements, and the absence or presence of an expanding market. All these could either contract or expand a company’s stock fortunes. If other steps are taken that stakeholders interpret to be positive or negative, they will make a difference.
The Concept of Buying Low and Selling High
The Bitcoin and stock markets sway to market and non-market forces that could cause a dip and rise in price. In view of this, investors are taught to watch out for a price crash scenario so that they can profit thereby. In essence, when prices drop to a reasonably low level, it is wise to buy and sell in a price rise.
Anyone who is deep in cryptocurrency investment should be aware that bitcoin price has been volatile since 2018. It has dropped to its lowest levels in months over the course of the last 24 months. Somewhat, between the price plummet and spikes, there has been a window to reap price gains.
In the stock market, a similar fortune can be deduced. In 2018 Q4, there was a general crash in prices that was catastrophic. Nearly 1 trillion dollars was wiped out in one week of a massive dump of stocks across the board. This was a global meltdown that swept through global financial markets like a tsunami.
Like bitcoin, the stock market has picked up some momentum since the beginning of the year. For those who bought the stocks and bitcoin in a price slump, they have a sizeable reward to report so far.
The Old-time Practice of Arbitrage
In simple terms, arbitraging is a movement of funds from a point of surplus to a point of deficit or vice-versa. For those who use the best crypto trading guide, they must be familiar with this concept. In a period when prices are going downhill, a safe place for your money in the bitcoin market is fiat.
However, fiat is relative to cryptocurrency trading. In the place of fiat, there are stablecoins. So, if prices are plummeting, you can choose a stablecoin of your choice to exchange your bitcoin balances. So, when prices begin to pick up, you can fairly well begin to buy bitcoin once more.
In the stock market, a number of schemes are available to help your arbitrage. To escape the haunt of losses in stock value, you can swap your shares for some futures or do a fiat swap. To reduce your losses if prices are fast falling, you can sell your shares and buy other high dividend options instead.
Using Your Stop-Loss and Market Orders
Bitcoin and the stock market can be traded with loss reduction and profit-saving techniques. Thanks to the cryptocurrency exchange and stock brokerage firms. Unlike cryptocurrency exchanges, retail holders do not sell or buy directly on the stock exchange
Stock brokerage firms provide customers with trading tools they can use to create, sell or trade their investments. Presently, as a retail user on a crypto exchange, you can create, sell, and trade your coins and tokens directly. You can do this with bitcoin directly using your crypto exchange account.
The availability of crypto trading bots makes it easy to automate your bitcoin investment deals. You can use a stop-loss to indicate the price level to sell off your coins when prices drop. You can also use a limit order to buy or sell bitcoin at a price range you are comfortable with.
In the stock market, a stop-loss helps you to avoid losses by executing a sale at a set price level. You can also use a market order to buy any stock at a prevailing market price. This is advisable when it is a bull run. A limit order will also help you sell or buy a stock within the range you have pre-determined.
Despite the seeming apathy of traditional stock market traders and institutions towards cryptocurrency, they share many similarities. The same pump and dump risk apply to both markets although, with blue-chip stocks, this is less likely. Same goes for bitcoin, as a price manipulation looks less likely. Conclusively, bitcoin and stock market provide a room for massive gains if you know how they work.
Denise Quirk is a Health Advisor who is fascinated by Crypto and Blockchain Revolution. She is a believer in transforming complex information into simple, actionable content. She is keenly interested in finding the value of the crypto world. You can find her on Linkedin, Twitter and Facebook.