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Date: 2018-12-10

How the Cryptocurrency Market differs from the US Stock Market

The "crypto" market is widely regarded as an unregulated & decentralized "stock" market - allowing users to "buy" tokens (shares) in the various "crypto" systems out there...

Indeed, part of the success of "Bitcoin" (or similar) has been due to the way in which some bright spark discovered a way to identify the prices of the various "coins" in the market.

There are now a number of coin "tracking" websites - the most notable being CoinMarketCap.com, which essentially provides users with the ability to keep an eye on the way in which the coins are performing financially, as well as part of the overall "crypto" market.

The reason this is important is because when you're looking at the similarities between the "crypto" market (including "Bitcoin") and the likes of the US stock market, you're basically looking at a system which works in a similar way to each other (allows you to send and receive assets between two or more parties) - but the way it's done is somewhat different.

This tutorial is going to examine how both work, both on a technical and economic level...

How The Stock Market Works

The "stock" market is what's known as a primary market.

This means that companies (who are quantifiable by the revenue & profit they earn) are able to "issue" stock / shares in their businesses. These shares permit the "investor" to own part of their asset-base, the "value" of which is determined by the way and level at which the company is able to generate revenue.

Since the stock market is a "primary" market, it means that people are buying from the issuing company directly. This has lead to the regulated system we see today - where regulated exchanges (such as the NASDAQ) are able to offer securities, shares and other assets in a regulated environment.

To this end, when you participate in the likes of an IPO, what you're really doing is purchasing shares in the companies at a cheaper price - hoping that they'll rise significantly.

The point is that whilst the "shares" market could be construed as being somewhat similar to the "crypto" space, it's not entirely the same thing. Each "share you buy is basically backed by a company's asset-base - and thus has a quantifiable value on the marketplace.

The underpin to this is that the "stock" market is basically the process of getting companies to provide access to their asset base for a fiscal return. By selling part of their business, they essentially have a responsibility to give the investors part of the profits - which is done as a "dividend".

Dividends are used as one of the main buttress of value - if a company is profitable and able to pay continued dividends, most investors are typically quite happy. It gives them a direct return as well as ensuring their capital is going to grow. This is why the stock market is seen as such a powerful tool for growth, especially in the US...

How The Crypto Market Works

The "crypto" market works a little differently.

Firstly, it's primarily a secondary market (no central issuer involved), which means that you're buying/selling between ordinary people.

This is not a big deal, but when it comes looking at the "value" of the system, you need to realize that it's basically the case that you need to be able to determine the quality of the underlying investment. It's much more difficult to do this with other people as it is with a company.

Secondly, none of the "coins" are backed by any real asset base. The US stock market has strict regulations on what type of businesses it will allow to operate within its jurisdiction; not having this with the "crypto" space has lead to a *large* number of different "coins" which are extremely negligible in terms of what they actually provide to the user.

This basically means that the "market" in itself will be highly volatile (as it's predominantly focused on price). This means that if you're looking at making any sort of "investment" into the space, you're essentially doing so for the simple reason that you're hoping that the price of a "coin" will increase, so you can cash out with a profit. This is a loser's game and strongly discouraged.

Ultimately, the way that the "crypto" space is entirely unregulated; and focused on providing users with the ability to buy a myriad of questionable "coins" is by far and away one of the most questionable investments in the modern financial landscape...