10 Tips for Cryptocurrency Traders venturing into the Stock Markets Today!
How to use the Great Lockdown Crash to expand your portfolio beyond Cryptocurrencies
Photo by Markus Spiske on Unsplash
How to use the Great Lockdown Crash to expand your portfolio beyond Cryptocurrencies
This is an exciting time for traders both in the cryptocurrency space and the equities space, as we see great volatility and movement in both these spaces.
In the past 3 months, global stock markets have seen sudden drops and recoveries (April 2020), and businesses are shuttering all over the world. The International Monetary Fund expects the biggest recession of our lifetime just around the corner.
“This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.” — IMF
In this same period, Bitcoin has dropped by 50% at one point, despite a halvening expected soon in May 2020. Financial markets across equities, cryptocurrencies, credit and debit are going through great volatility and activity in this period.
BTC/USD 20 April 2020— chart from tradingview.com
With all these market movements, it is now a great time for cryptocurrency traders to start looking at the stock markets because there may be better risk reward ratio in that space. It is also an option for cryptocurrency traders who have made money from active trading, to load up on high reward stocks with this pullback.
The interesting factor (and conversely uninteresting) of stocks is that it has decades of risk-reward expectation and a clear base line of fundamental value. A massive drop below its inherent value, will eventual revert to its long term inherent value.
In a normal world situation, cryptocurrency may provide better risk-return as it is a financial instrument that is still an evolving valuation (similar to Private Equity last decade), however, in this Great Lockdown Depression of 2020s, there could be a great opportunity.
Hence, to take advantage of this, here’s a handy translation guide for the Crypto OGs’ who did not start out as stock traders first (the Old Gs!).
S&P 500 since the last Great Crisis. We are at the precipice of another cliff. P.s.: Not financial advice! — chart from tradingview.com
1. Liquid Stock Names
These are like the BTC or ETH of the world, where there is always liquidity for you to enter and exit. The obvious ones are the large country indices like S&P500, Dow Jones, Nasdaq. In Hong Kong and China, you would have the China A50, Hang Seng Index, Hang Seng China Enterprise Index. In Japan, there is the Nikkei 225. In Singapore, there is the FTSE Straits Times Index, however it is significantly less liquid that the others listed here. Technically speaking, you would buy the Exchange Traded Fund that tracks the Index.
Other than, Index ETFs, you can buy the most liquid stock names in the world, typically characterised by their large market capitalisation.
2. Bid-Ask Spreads
In this aspect, the stock markets are different from the Cryptocurrency world in that there is a standard exchange price (as long as you are buying from a Direct Market Access-DMA platform). For the crypto traders who want to arbitrage exchanges, there is no opportunity, however, for traders who have been caught ransom by broker impacted spreads, this will be a godsend!
Furthermore, when you trade the liquid stocks, your Bid-Ask Spreads tend to be very tight, compared to cryptocurrencies.
3. IPO — The grandfather of ICOs
An IPO can be very similar to an ICO in that there has to be a purpose of the offering and a value benchmark. In IPOs, the value benchmark is always a currency peg. In an ICO, there are more ways to peg; either to a crypto token or to assets.
In a market downturn, you will rarely see IPOs, except for the brave, crazy or magical.
4. Deposit and Withdrawal Fees
This is where many crypto traders are paying a norm that is unheard of in the stock market world. In most stock trading accounts, there are no deposit or withdrawal fees, unless they have exceptionally cheap commissions.
5. Commissions
The commissions in the Cryptocurrency world is extremely high at a blended level of 2%-5%, when you add in the Bid-Ask spread and token conversions (where applicable). In the stock trading industry, there are even stock brokerages like Robinhood (in the US) and 8 Securities (in HK) the provide free stock trading.
6. Halvening/ Halving
Every crypto trader would be familiar with the Bitcoin halvening which basically reduces supply in the market. In the stock market, there is a similar activity during Company buybacks, however, the magnitude is not as extreme and nor as staccato.
Company buybacks do prop up stock prices, so you would not want to be in a short position when the buybacks are expected to be happening.
7. News Flow
The great part about stock trading is that News Flow is more accessible than Cryptocurrency news flow, because it usually comes from publicly available information. In crypto news flows, the activity usually precedes the news flows. A few large single players can move the market and effectively created the news event.
The current market capitalisation of Bitcoin is about 100 billion USD, and in stock terms that would put it in the lower third of the Top 100 largest stocks in the US Markets. When it is combined with the 24/7 trading hours and de-centralised exchange, it becomes conducive for big players to influence a market.
8. Technical Analysis
The easiest way to get started on stocks trading is to have some technical analysis knowledge. Most crypto traders are innately well exposed to price level interpretations, but technical analysis goes beyond that. It looks at aggregated price action, which is not consistently present in a cryptocurrency market. Elliot Waves is also another great resource for added colour to your chart.
9. Fundamental Analysis
This is the process of quantifying the inherent value in a stock price: the stripped down, naked value. This value provides stocks with a downside cushion (the stocks with good fundamentals) and the basis for upward plateaus.
For this moment, the close fundamentals in the cryptocurrency market is when Alt coins use BTC or ETH as their base peg, and thus making BTC or ETH their fundamental. Nonetheless, BTC and ETH themselves are not fundamentally driven.
10. Buying Up and Selling Down
Because of its fundamental values, stocks have seasonal changes to its Bullish and Bearish propensities, and that can materially impact the odds of your trade. Take for example, a stock that has really good fundamentals, but having a bad flu this week; it would be dangerous to short it because the stock can turn bullish anytime. Conversely, a company stock that has bad fundamentals would have much better odds for a shorting opportunity.
The general guidelines is that if you have a stock trading position that goes beyond half the week, you definitely need to have an appreciation of the fundamentals of the stock. It will perversely alter your Bullish / Bearish profit ratio.
I hope this teaser into the stock market can help you on your way to expand your range of trading opportunities. As you would already know from crypto trading, you need to take a dip and experience the markets to really learn. Hence, do start small, but the great news is that there is no better time than now to get started.
The quiet ICO markets, lavish BTC valuations, and upcoming Stock market pullback, puts the odds squarely in your favour!
Anything I missed or you would like to know more? Drop a note on the responses below!
Disclaimer: I write as a hobby on topics that I find useful to have a voice on. Nothing here represents the opinions of current or past employers, nor product recommendations or financial advisory in any form. I hope you find the writing useful.