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It’s been more than 15 years since the first crypto exchange, BitcoinMarket, appeared online, giving a start to the earliest meaningful trades in cryptocurrency. Since then, the crypto market and trading cryptocurrencies have matured significantly, with countless exchanges, decentralized finance (DeFi) protocols and other trading platforms currently supporting the game of buying and selling crypto.
Despite the ongoing maturation process, the crypto market is still vastly different from the stock market. As a relatively young market, crypto has starkly different characteristics from those applicable to the highly mature equities trading environment. Compared to stocks, the crypto market is more volatile and focused on shorter-term trader strategies — just some of the many differences easily observable between the two markets.
Yet, there are many strategies, concepts and principles of the stock market that traders can adopt, in many cases with requisite adjustments, to help them be more successful in the fast-paced, emotion-filled world of cryptocurrency trading. The key here is to differentiate what works for crypto from the world of equities trading — in order to determine what can be adapted and what should remain exclusive to equities.
Key Takeaways:
Crypto traders can adopt some of the more useful tools, concepts and strategies from the equities market.
While direct application of project valuation techniques used for stocks isn’t feasible or advised for crypto traders, it’s critical to look at fundamental data pieces, such as market caps, project-related data and investors behind the project.
Applying risk management techniques, avoiding emotions and planning for the long term are among the key concepts that crypto traders can adopt from the common behavior of equities traders.
One of the key activities for a trader — whether in stocks or crypto — is valuation of the company or project they plan to invest in. This is especially relevant for the crypto market, as it's often driven by hype and unrealistic claims by token issuers.
The stock market has several time-tested valuation methodologies. Two main stock valuation types are used for stocks: absolute and relative.
Absolute valuation, also known as the estimation of intrinsic value, is based on evaluating the company's fundamental data and records. Popular absolute valuation methods include the dividend discount model (DDM) and the discounted cash flow(DCF) model.
Relative valuation methods determine the company's value relative to others in the same market segment, particularly in comparison to key competitors. The most popular relative valuation method is the comparable company analysis.
Crypto traders deal with a lack of objective and publicly available indicators needed to valuate the project or protocol whose token they plan to buy or sell. One measure they can use to gauge a token’s real-world value is its market capitalization. While this information is handy, it's far from the only component required to establish a cryptocurrency's long-term prospects.
A savvy crypto trader also looks into wider macroeconomic data to estimate the overall market's future direction, sources information on a token's utility functions, reads the project's white paper and researches information on the team and investors behind it — and more.
Many crypto traders adopt high-risk strategies, hoping to earn outsized returns quickly by picking obscure altcoins or using unjustifiably high leverage levels. The result of such strategies is often catastrophic. Instead of dancing on the knife's edge, crypto traders would do well to apply some risk management techniques widely used in the stock market. Some of these proven techniques that crypto traders may adopt include portfolio diversification, placing stop-loss orders and applying risk-to-reward analysis.
Portfolio diversification calls for holding different assets, or even asset classes, that share low or negative correlations. For instance, a Bitcoin (BTC) investor could allocate some of their funds to non-tech equities that usually share low correlations with the cryptocurrency. To easily diversify your investments, you can use Bybit's MT5 multi-asset trader account, which supports trading in different asset classes, including crypto, stocks, gold and forex.
Placing stop-loss orders involves specifying certain price points that automatically trigger buy or sell actions for the chosen asset. These orders are a great way to limit your losses and avoid emotional decision-making, a pervasive problem in the crypto market's highly volatile and sentiment-driven environment.
Risk-to-reward analysis is based on the ratio of the amount the trader risks to lose by placing an order to the potential gain from it. For instance, if buying an altcoin and holding it for a specified amount of time could earn you $300 in profit but might also result in an estimated $100 loss, the risk-to-reward ratio is 1:3, or 0.33. Naturally, lower ratios are preferable.
Certain risk management measures are also built into Bybit’s Unified Trading Account (UTA). These are known as the Lending Pool Auto Repayment Rules, and they specify thresholds at which users with dangerously high borrowing levels receive automatic notifications and have their debts automatically repaid.
Stock market traders often use chart patterns to look for indicators, such as support and resistance levels, volume fluctuations, moving averages, candlesticks and more. Some of the most fundamental indicators relate to trends, specifically trend continuation and trend reversal patterns. The former helps identify when an uptrend or downtrend is likely to continue, while the latter signals that a trend is changing direction.
Some key trend continuation patterns include the rectangle pattern, rising and descending channels, flags, pennants and triangles. Among the common trend reversal patterns are the cup and handle, rounded tops and rounded bottoms, head and shoulders, rising and falling wedges and diamonds. Thanks to the established nature of the equities market and consistent behavior by large institutional players, these indicators serve as potentially reliable estimates of future price movements.
Chart patterns can also be a valuable tool for crypto traders, but their use and interpretation must be adjusted to consider the cryptocurrency market's unique properties. Since the crypto market is open 24/7, volume spikes and patterns can form at odd hours. Due to the lower liquidity of the crypto market (as compared to equities), chart patterns can also be more subtle and unclear, especially for low-cap altcoins. Moreover, the higher volatility in the crypto market means more frequent breakouts.
Additionally, due to the much lower presence of institutional players, crypto volume changes may not indicate "smart money" activity but rather sentiment- and hype-driven naive money — i.e., actions of retail investors acting based on impulse or biased information.
Finally, trends are often of a much shorter nature than in the stock market, due to many of the same factors — high volatility, emotion-driven decisions, susceptibility to hype and the dominance of retail investors.
Patience is what many crypto traders often lack. Many stock traders take their time, waiting for weeks or months to enter or exit positions. They evaluate macroeconomic data, wait for company quarterly reports and aim to spot long-term trends to ride. In contrast, many crypto traders chase short-term quick wins and are gripped by the fear of missing out (FOMO), falling for pump-and-dump schemes and investing in coins with unclear potential.
The patience of a typical stock trader is the best behavioral feature for a crypto trader to adopt. Instead of being driven by emotions such as FOMO, cryptocurrency traders are advised to carefully study crypto token and market fundamentals, waiting for an appropriate moment and investment target to appear. Researching the effect of significant market events — e.g., Bitcoin halving, new pivotal Layer 2 platforms, changes to major blockchains [such as Ethereum’s 2022 move to proof of stake (PoS)], regulatory changes to crypto in key markets, inflation data updates and interest rate decisions by the US Federal Reserve — will also help traders identify good investment opportunities for long-term success.
The stock market has many valuable tools and concepts that crypto traders can adopt. However, understanding the differences in applying these tools to the cryptocurrency market is crucial. Established company valuation methods may not be easily applied to the crypto market, but looking into key fundamental data related to web3 projects is one useful measure to adopt.
On the other hand, using certain time-tested risk management tools, such as stop-loss orders and portfolio diversification, is somewhat more directly applicable to crypto trading.
Studying chart patterns is also critical, but many parameters need to be adjusted — as direct application of chart pattern analysis to crypto trading isn't advised. Instead, it’s wise to consider the unusual volume patterns, shorter trends, less clear indicators and more frequent breakouts that are a result of the crypto market's higher volatility, 24/7 trading and lower institutional investor presence.
Most importantly, patience, emotion-free analysis and long-term planning are what the archetypical crypto trader can choose to adopt from the behavior and habits typical of their stock market counterparts.
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