Digital currencies are a concept unlike anything the world had ever experienced prior to the advent of Bitcoin in 2009. Since then, many have found difficulty in classifying the young industry and fully understanding the market’s context. Now, some compare it to the stock market.
Often, the digital currency industry is compared to various ‘bubbles’ of the past, such as the Dot-com bubble from the late 90s or even the tulip craze in the 1600s, yet the future of digital currencies is impossible to predict.
However, understanding the relationship between digital currencies and the stock market (also known as the equity market) can help to contextualize the maturity of the digital currency industry and grant insight into how the market operates.
The stock market and digital assets
From a digital currency proponent’s point of view, the stock market is often seen as a ‘traditional’ avenue for investment. Here, investors purchase stock in publicly traded companies, with the hopes of financial return. These investments take the form of both long and short-term investments, and often rapid price fluctuations are viewed as a deterrent for potential investors.
Comparing this to the digital currency market, a few key differences are immediately apparent.
For digital currency enthusiasts, rapid price fluctuations are often seen as an opportunity for investment, rather than a deterrent, with many hoping to purchase digital assets for the purpose of fast returns.
Additionally, thanks to the popularity of digital currency exchanges in recent years, it is easier than ever to trade digital assets, and members of the community can easily change between the various currencies they’re invested in.
When considering the digital currency market, observers view a unique perspective held by many digital currency enthusiasts.
According to advocates, digital currencies are an inherently disruptive and rebellious medium.
These enthusiasts praise digital currencies for their ability to redistribute wealth, challenge traditional financial institutions, and take monetary governance away from governments.
When participating in an Initial Coin Offering (ICO), or purchasing digital currencies, individuals are often supporting the platform more than just financially. Holding and spending digital currencies is a way of legitimizing them, and this is especially the case for currencies that make use of ‘masternodes.’ Masternodes are a method of governance where individuals that hold a certain amount of a digital currency are given power in the ecosystem.
As a result, there are many stories of accidental digital currency earners that made ‘investments’ purely to support the movement or technology. For instance, many developers appear on Forbes’ list of the industry’s wealthiest people.
Many in this category would not call themselves investors, highlighting an opinion that differs from the majority of those involved in the stock market.
Blurring the line
Especially in the early days, many from the investment world were skeptical of digital currencies. This continues in the present day to some extent, with some institutions forbidding their workers from partaking in the digital asset craze, and governments seeking to investigate potential risks on behalf of the public.
However, as digital currencies continue to earn recognition in the public eye, they are also furthering their legitimacy in the mind of investors.
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In the last year alone, indications that traditional investors are increasingly involved with digital currencies are abundant in the media.
As CNBC reported, the 2,000% price surge that bitcoin experienced in 2017 garnered enough attention from Wall Street to launch futures contracts on CME and Cboe, the two largest futures exchanges in the world.
Digital currencies also impact the stock market in inadvertent ways.
For example, companies adding ‘blockchain’ to their titles experienced a significant rise in the value of their stock prices.
Further examples of the investment world partaking in the digital currency landscape can be viewed in Bloomberg’s decision to add several altcoins to their price feeds in late 2017. This was significant as Bloomberg Terminals are a widely popular resource in the investment world.
Additionally, Weiss Ratings, a ratings industry that catered to the investment market since 1971, recently released the world’s first list of digital currency ratings.
The easiest explanation given to digital currencies is that they exist in an asset class unique to the industry.
As this asset class continues to foster legitimacy and tempt investors that were previously uninterested, definitions surrounding the digital currency industry continue to evolve.
Interestingly, both the digital currency market and the stock market are currently experiencing similar price fluctuations.
As Joe Weisenthal of Bloomberg observed on Twitter, Bitcoin and the stock market had a significant point of correlation in early February 2018.
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While the source of this correlation is unclear, and could just be coincidence, it challenges the concept that ‘digital assets’ exist in a world of their own.
As global financial services firm Morgan Stanley observed, a potential correlation between the digital currency market and the stock market could be due to the increase in the number of digital currency hedge funds.
With this increase, larger investors can theoretically influence the market, similar to how they influence the stock market.
However, Morgan Stanley also stated that heightened correlation between the digital currency market and the stock market could be detrimental to currencies like Bitcoin, which many praise for not being correlated with other financial markets.
Ultimately, as the relationship between digital currencies and the stock market continues to grow, it’s possible that the two markets could find themselves increasingly intertwined.
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