Traditionally, stocks convey ownership of a company. When a company is first established, the founder fully owns the business and may sell ownership shares to investors. However, once the business is established and has reached a certain valuation, the company may sell its stock to the general public in an effort to raise more money and to allow early investors to realize a return on their investment.
Cryptocurrency’s prices tend to change rapidly
In general, cryptocurrency’s prices tend to change quickly, mostly due to a number of factors. Despite being a relatively young and new technology, the cryptocurrency market is still growing and attracting new users on a daily basis. One recent estimate found that more than 100,000 new users join cryptocurrency exchanges daily, adding to the high level of volatility. Furthermore, new users have a vested interest in the price of a cryptocurrency, which makes it even more volatile.
In recent years, cryptocurrencies have become extremely popular speculative investments. Despite being a new technology, cryptocurrencies are inherently wasteful and resource-intensive. Prices of many cryptocurrencies have fallen more than fivefold in the last six months. This phenomenon has led some to call for regulation. Meanwhile, the price of the biggest cryptocurrencies, such as Bitcoin and Ethereum, has plunged by as much as 55%. In mid-2021, Bitcoin’s value soared to over US$70,000, before falling back to less than US$30,000 by the early 2022. Other rival cryptocurrencies have also experienced similar volatility.
While these cryptocurrencies are a form of money, they are not widely accepted as a method of payment. In fact, the prices of cryptocurrencies tend to fluctuate rapidly, so it is difficult to determine their long-term value. For example, a $10 bill may be enough to buy a cup of coffee one day and a fancy dinner the next. However, despite these risks, they are becoming more popular in recent years, and the crypto market is expected to grow at a rate of $1-2 trillion by 2018.
Stocks’ stability
When investing in the stock market, you’re faced with the constant question: is crypto better than stocks? Both are safe investments, but they come with varying levels of risk. A good strategy is to use a combination of both, and keep the majority of your capital in low-risk, low-reward investments. But before you make the leap to cryptocurrency, you should understand what you’re getting into.
One key difference between stocks and cryptocurrencies is their volatility. While a stock’s price rises and falls with the stock market, a crypto’s rise and fall is less volatile, but this doesn’t mean that it’s completely unreliable. While the stock market has an almost uncontrollable level of volatility, a cryptocurrency’s rise and fall often depend on political decisions.
The difference between the two can be found in their return patterns. During the period between 2010 and 2019, Bitcoin’s returns didn’t move in any direction with the S&P 500. In 2017, the correlation coefficient was only 0.01; in 2020-21, it was 0.36, and subsequently, crypto assets moved in lock-step with stocks. This trend is especially evident in emerging markets, where adoption of crypto assets has been particularly rapid. In 2020-21, the correlation between the MSCI emerging market index and Bitcoin was 0.34, up 17-fold from previous years. This relationship between cryptocurrencies and stocks is not completely understood, however.
The correlation between stocks and bitcoin is significantly higher than that between stocks and other asset classes, raising concerns about the impact of a sudden market dip on stocks. This increased correlation, however, limits the benefits of risk diversification and creates a risky asset. In the past, cryptocurrency showed low correlation to major stock indices, which led to the assumption that it would act as a hedge against swings in other asset classes. But this relationship has changed in early 2020 after central banks responded to the crisis. Furthermore, it has become much more prevalent during periods of global financial ease and a growing appetite for risk.
Regulations could hurt demand for cryptocurrency
Regulations could damage cryptocurrency prices. The US Treasury has stressed the need for new regulations in order to combat global and domestic criminal activity. In December, FINCEN proposed new cryptocurrency regulations to impose data collection requirements on wallets and exchanges. These regulations will be effective by fall 2022. The proposed rules require wallet owners to report suspicious activity for any transaction worth more than $10,000 and must verify their identity when sending more than $3,500 in one transaction.
In the cryptocurrency community, there is a long-standing fear that regulations will suppress innovation and growth. But it is also hoped that regulation will address the many challenges that prevent wider adoption, including money laundering and cyberattacks. For example, Rishi Khanna, CEO of Stocktwits, believes that regulations could help reassure crypto skeptics. But how could regulators protect consumers? What is the best way to ensure a level playing field for crypto investors?
The price of cryptos is determined by supply and demand. If demand outstrips supply, the price goes up. A drought, for example, can drive up the price of grains or produce. Similarly, the price of cryptocurrencies can increase as demand exceeds supply. A country’s government crackdown on cryptocurrency mining operations could hurt the market in any country. Whether a government crackdown has a positive or negative impact on cryptocurrency prices is unclear, but it is possible that it will make cryptocurrency users look elsewhere.
While the government is exploring how to regulate the use of cryptocurrencies in Europe, it is not clear how much they would regulate. In the meantime, the European Central Bank is considering issuing its own digital currency. This move will only increase the regulatory burden on the industry. In September, the European Commission published a draft regulation proposal for cryptocurrencies called Markets in Crypto Assets (MICA).
While most countries in Europe have passed regulatory measures to protect the public and prevent criminals from gaining control of crypto exchanges, many countries have yet to act. Mexico recently passed a law extending existing AML regulations to cryptocurrency services. In addition, the law specifies various reporting and registration requirements. While many countries in Latin America have voiced their concern over the impact of cryptocurrency regulations on their financial stability, most governments have not revealed any major plans for significant regulation of the cryptocurrency industry.
The UK has already made a step in cryptocurrency regulation. It introduced a new legislation to address misleading crypto asset promotions. The government also announced plans to align cryptocurrency advertising with financial advertising in Japan’s PSA. These are just a few of the latest moves that will affect the market. However, further regulation of the industry is needed to ensure that it remains a viable option. So, while the UK is a welcoming environment for cryptocurrencies, regulatory developments in the UK and elsewhere may have an adverse impact on the industry’s price.
