At times, cryptocurrency and stock traders feel like polar opposites.
On one side, stocks represent a centuries-old way of doing things. There are well-established standards, rules and even trading hours.
On the other side, cryptocurrency, as a concept, is just over a decade old. The rules are sparse and relatively easily ignored and you can trade 24/7/365.
This can be daunting for crypto and stock traders looking to make the leap into the other realm, as they sometimes feel hopeless to know where to start.
Now, there are a plethora of articles made available to stock traders looking to get in touch with the crypto market as crypto projects are very new and a number of the players are willing to spend lots of money to get new people into the crypto ecosystem. This makes it easy to learn about cryptos, as projects are fully incentivized to get you up to speed.
But that olive branch doesn’t really extend the other way, at least not in the same way. As previously mentioned, stocks have a lot more rules and conventions around them, which can make it hard for crypto investors to know where to start.
So without further ado, here is The Crypto Trader’s Guide to the Stock Market, and please, don’t leave the blockchain without it.
Graphs
For starters, any serious crypto investor can take a step back and give themselves a gold star. Technical analysis is technical analysis. Graphs are graphs. Moving averages, support and resistance, and volume; are all the same for cryptos as they are for stocks. This isn’t to belittled trading on technical analysis, it's quite complex. But the variables at play are pretty much the same between the two.
If you want to watch candles, buy micro-dips, and become a high-frequency trader, you’ll still need the knowledge from the rest of this article, but you can rest assured knowing that the core of your trading expertise is a transferable skill.
While the crypto market holds the crown for being the most-volatile thing in the space-time continuum, there are a lot fewer avenues for potential calamity to your holdings in cryptos. Bad Musk or Cuban tweets, a nation bans it, incoming taxes, a hack, and - the occasional - press release from the crypto project can all move the needle quite significantly. And there isn’t too much else. Bad coverage on high fees and congested networks can hurt, but those ones above can send the market for a whirl.
In stocks, there are so many more narratives that can help or hurt you. So read on to know where to start.
News
This is something that can completely make or break your day and, sadly, unless you sit eyes glued to the screen, your portfolio will likely reflect the news before you even hear about it.
News can come in a few different forms. Press releases from companies, scheduled earnings reports, dividend ex-dates, economic events, and analyst notes, among many other things.
What I’d encourage crypto investors to do here is to think of the news in a tiered fashion. What is scheduled, what is loosely scheduled, and what is out of your control?
Earnings, dividends, and economic events are scheduled events. They get announced and are typically well-known for a while before they come to fruition. You aren’t in control of any of this and don’t disillusion yourself into thinking otherwise, but you are completely capable of knowing what upcoming day/days could have a higher volatility due to a poor showing of the Services PMI or poor reported earnings growth. Keep in mind that some companies are proxies for their industry. If the proxy has a bad earnings report, your stock could fall, so know the earnings date for competitors too.
Loosely scheduled data is things like analyst price targets and notes. I call these loosely scheduled because a majority of notes come around the stock’s earnings date as analysts get their estimates in and react to the disparity between estimates and reality. You can’t know that JPMorgan analysts are going to downgrade your favorite stock from Buy to Strong Sell and spark a sell-off, but you can know that they will, at the very least, reevaluate their position on the stock every three months around their quarterly earnings reports.
Everything else is out of your control, but you can still protect yourself. Random leaks reported on the Wall Street Journal about how Meta is “riddled with flaws that cause harm” or short-seller reports by Hindenburg about how Nikola is “an intricate fraud built on dozens of lies” are not things you can watch a calendar and plan for. But, by placing stop-loss orders when buying stocks you can prevent losing more than 10% on a stock in a given day by automatically selling when a 10% drop occurs.
Now, it doesn’t run on a smart contract like the immutable stop-loss orders at Decentralized Exchanges, but, as it turns out, all that really matters is that it sells before it drops 10.1%. And stocks hold an advantage in doing so as there is so much more liquidity in the stock market, meaning, the sale will likely be swift as a buyer definitely exists somewhere.
Forward-thinking
This is a small section, but one that crypto traders must understand if they are going to be successful at trading stocks. Stocks are priced for future earnings growth. And yes, I feel the eye-rolls from the crypto investors. Yes, cryptos are also priced for the future, but they really are (for the most part) priced based on increased adoption of their software, or maybe just future demand for that particular coin or token. This is different from stocks where company earnings are the focus. Cryptocurrencies don't have revenues, expenses or earnings, so there are no quarterly numbers to report.
The distinction between the two is significant: one frequently uses a complex formula based on project growth in sales, expenses and other business factors to try to make some accurate assumptions about the future of a company, which can include stock-price targets, while the other uses “price predictions” that any person can type into a box on several sites.
Price "predictions" is a good word for cryptos, rather than price targets, because we don’t really have any clue what the effect mass adoption will have on future prices.
Consider if Carvana and Best Buy both accepted Ethereum. Best Buy would have tons of small transactions, while Carvana would have fewer, relatively larger transactions. If we imagine they both move the same amount of money per day, Best Buy’s use of the chain will be more likely to congest the network and push the gas fees higher. Meanwhile, Carvana’s will come in larger batches and will contribute less to fees, however, through larger transactions, it could move the needle on prices and have a bigger impact on price volatility. This is all to say, we can’t accurately predict what adoption, the thing cryptos are priced for, with any amount of accuracy until it starts happening.
Valuations
This is where stocks can probably get pretty intimidating for crypto traders. There is no PE or PEG ratios to worry about for cryptos, and there certainly is no such thing as a discounted free cash flow analysis.
I’m not going to go into depth re-explaining these, instead, I’ll get you familiar with the learning center so you can DYOR. Starters would do well to read about: the PE Ratio, the Sharpe Ratio, the PEG Ratio, and the Capital Asset Pricing Model.
Additionally, crypto investors can use the Valuation and Fundamental Rank to help them get a better understanding of what the resulting numbers mean relative to the market as a whole. The Fundamental Rank considers the underlying business behind the stock and expectations set on it by Wall Street analysts. Meanwhile, the Valuation Rank helps find stocks that could be considered under- or over-valued based on some of the various ratios used by investors to make that judgment.
Market Characteristics
Lastly, just keep in mind that there is such thing as a market close in stocks, unlike the 24/7 market of cryptos. Also, for what its worth, stocks are on Eastern Time, so keep that in mind West Coasters.
But the fact that markets close for nights and, on occasion, entire days, creates interesting trading dynamics that can send your portfolio for a ride.
During weeks surrounding market closures for holidays, there tends to be a lot of cashing in on vacation days by institutional investors. This means that volume is very low during those days and volatility can be high (although high volatility for stocks is very different than high volatility in crypto).
Also, be careful during early morning and late afternoon trading. When the market opens, retail traders rush to react to last night and this morning's news. Meanwhile, in the late afternoon right before close, institutional and retail traders alike are trying to get their bets placed for the next day’s session. All-in-all, this just means that those times of the day tend to be more volatile and its worth knowing that.
One thing that can get you to take silly losses is seeing your stock drop a lot right at market open. After the rush, people might start buying that dip and by the end of the day, it likely will pare some and, in some instances, all of those losses. Markets are run by people and people overreact to things, remember that.
Lastly, keep the tax implications of sales in mind and learn more about closing a position here.
