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Wall Street vs. Cryptocurrency: A Financial Showdown

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One of the best ways to build wealth over time is to invest your money. Choosing suitable investments can be tricky because all investments are subject to some level of risk.


Cryptocurrency has been in the headlines lately as prices have plunged over the past couple of weeks. The price of Bitcoin has fallen by around 40% over the past 90 days. Ethereum is down by about 12% over the past 30 days, and Dogecoin, the popular memecoin making headlines, has dropped by approximately 16%.


While crypto has proven that it can be incredibly volatile, the stock market has experienced its fair share of turbulence as well. Just last year, the S&P 500 lost more than one-third of its value during the early stages of the COVID-19 pandemic.


Cryptocurrencies are now the new frontier of investments and even Wall Street has started to notice it. People are talking about the next great Initial Coin Offerings (ICOs), investing in blockchain technology, and even adding cryptocurrencies into their portfolios all the time. We even have major cryptocurrency companies like Coinbase entering the stock market.


While cryptocurrency has its ups and downs, it's still going strong. It's relatively safe to call cryptocurrency an increasingly mainstream phenomenon as we've seen with the rising corporate adoption of Bitcoin. Even major investment firms like Merrill Lynch have started to roll out funds that involve Bitcoin and Ethereum. Microstrategy now has over 100,000 BTC in its holdings.


A big issue crypto has to deal with is the way investors perceive it. Most beginners don't know the differences between crypto and stocks and end up getting burned because of it. Before you plunk down money on crypto, make a point to remember that investing in tokens isn't the same as investing in stocks. The most significant difference between crypto and stocks can be seen in how each is valued.


Wall Street vs. Crypto Investing


Intrinsic Value & Fundamentals

Stocks are backed by companies that are expected to turn a profit. They involve physical assets as part of their valuation, and you can determine whether a stock is valued correctly on market price using math.


Cryptocurrencies, on the other hand, aren't always backed by companies. They are mainly valued based on the hype they have, though some also get valuation raises based on their functionality. Since it's a more subjective valuation, it's not always easy to predict whether a currency is worth it.


Volatility

The volatility is different. Do you know how cryptocurrencies are mainly valued based on their reputation? Well, that makes for a very volatile market with extreme highs and lows. The crypto market is unpredictable and prone to sudden currency crashes. In terms of investing behavior, this leads to one of the most striking differences between crypto and stocks.


Furthermore, stock investors tend to hold their stocks during times of volatility, knowing that things will eventually smooth out. Because crypto is as wildly unpredictable as it is, it's not always wise to HODL (hold on for dear life). As a result, panic-selling is more common, and at times, also more advisable in the crypto scene.


Risk Of Fraud

Stocks are heavily regulated, and most have to go through yearly audits to continue to be traded on the market. Because of the heavy scrutiny that comes with making your stock, it's improbable that the stocks you invest in will be fraudulent. Even still, there have been quite a few high-profile cases of stock market scams over the past few decades.


Crypto, on the other hand, has historically been more prone to fraud due to its decentralized, unregulated nature. Not only do actual ICOs and cryptocurrencies have the potential of exit scams attached to them, but actual cryptocurrency exchange scandals mean that you could easily lose your portfolio reasonably quickly if you aren't doing your due diligence. This will change as regulators continue to ramp up efforts in order to protect cryptocurrency investors.


Phenomenal Returns

With significant risk comes great reward. The reason many forego these potential risks is that cryptocurrency has had much more opportunity for larger returns than traditional stocks over the past few years. Many long-term investors have seen returns of over 1,000%, with short-term returns being no stranger to 150%. This is without considering the early adopters who truly believe in the technology and solutions being provided by cryptocurrencies.


Wall Street's Love-Hate Relationship With Crypto

The big investors are lovers of stability. While real money is made with volatile assets, what the investors love the most is the sense of control over their investments. They know that when trading stocks, they can predict the rise and fall of their value simply by looking at the company's performance. In this early phase of the new technology, cryptocurrency is just too new, volatile, and scary for many on Wall Street. It's much more difficult to determine when the surge or the fall is going to happen.


The Disruption of Traditional Currency and Fiat Markets

Cryptocurrencies are becoming an inextricable part of our society. They are actively permeating all the spheres of our lives: users pay for goods and services with digital assets and use them to invest. Businesses are implementing instant crypto accounting mechanisms into their processes.


Last year the well-known futurologist Thomas Frey predicted that by 2030 cryptocurrencies will replace 25% of fiat assets. Venture investor Tim Draper stated as far back as 2017 that Bitcoin and its derivatives will completely replace traditional money in 5 years. Morgan Creek Capital Management analysts, in their Q2 2018 stock market review, also made a statement to the effect that fiat will be entirely replaced by cryptocurrency in the future.


However, today, traditional money and cryptocurrencies remain very connected: cryptocurrency's worth is estimated in fiat, fiat is going digital, and many more cryptocurrency platforms are launching traditional asset trading. One way or the other, the existing competition between the fiat and the cryptocurrency markets may lead to their complete merging in the future.


Virtually every country today has legal tender that is fiat money. While you can buy and sell gold and gold coins, these are rarely used in exchange or for everyday purchases and tend to be more of a collectible or speculative asset. Cryptocurrencies, such as Bitcoin, have emerged over the past decade as a challenge to the inflationary nature of fiat currencies. Still, despite increased interest and adoption, these virtual assets do not seem to approach being "money" in the traditional sense.


It is good news for crypto markets: a nudge to traditional banks to offer support for blockchain infrastructure and even facilitate crypto transactions. Crypto investing has traditionally been reserved for those who were both knowledgeable and willing to take risks on an emerging market like cryptocurrency; but now with lower-risk entry points and simplified avenues through which one can enter the crypto space (like crypto ATMs), it's never been easy - or as safe - before!


Can Wall Street and Cryptocurrency Coexist Peacefully?

Given all the points mentioned above, our answer would be a calculated & optimistic yes. This is mainly because blockchain technology is disruptive, and it's not a zero-sum game where the win of cryptocurrency investing would equate to the loss of Wall Street.

July 23, 2021