Cryptocurrencies may not be your favorite asset, but you’ve definitely heard of them. It often gets very confusing as to what these coins actually are, how they operate, and how can people produce them and sell them for such high prices. Furthermore, how can a Stock trader find it extremely convenient to switch to cryptocurrencies, should he or she decide to do so? Well, the truth is that security tokens act like company shares in most of the cases. Let’s try to elaborate.
It all comes down to the ICO
An ICO is exactly what you think it is. It is the IPO for a cryptocurrency. Once a project has been completed, and the team has produced a fixed amount of coins, they then sell it to the public, once the private sale is completed. The company itself keeps enough coins for themselves so as to, remain the dominant power in the development of the coin in the future.
Here’s what Charlie Munger had to say at the Daily Journal meeting
Charlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More
The coins that they sell during these times are called, security tokens, which ensure that every person that buys the coin, is not only buying it to re-sell but also has a stake in the company. Usually, it is impossible to buy your way into an investors board through an ICO, that mostly happens during the private sale. But it has happened in the past with smaller coins.
For example, when Bitcoin trading in South Africa was becoming more and more popular, people started to learn about security tokens and smaller projects. Most investors diverted their attention to acquiring vast amounts of altcoins so as to influence them in the future. No matter how good-natured you may think investors are, most of them are pursuing profits. Therefore it became very dangerous to give one individual too many coins, therefore caps were introduced. A familiar feeling for stock traders.
Security Tokens trading is like fiat currency trading
The possession of cryptocurrencies may be identical to the possession of company shares. But the trading position plays out as if people are on a Forex broker’s platform. Most currencies on crypto exchanges are traded in pairs with Bitcoin, Ethereum and other stong altcoins. Buying in bulk is mostly done by investors and not traders. There is a distinct difference between them.
Investors buy and HODL, while traders try to utilize the massive volatility of the market, it’s like Financial Markets 101. But which option is better?
Security tokens - Investing vs Trading
Considering the volatility of the cryptocurrency market, many people can see the reason in trading cryptocurrencies rather than investing in them. However, not many exchanges allow margin trading, therefore the gains on those spikes and fluctuations aren’t too big. Even if there is margin trading, then traders are unlikely to get leverage above 1:10.
Investing makes a bit more sense, but not with large security tokens such as Bitcoin, Ethereum and others. It’s more realistic to do it with new cryptocurrencies, that has just come up. Invest the maximum amount and then sell once the ICO is over and the prices have risen to the desired level. That’s how most cryptocurrencies meet their end actually. The overwhelming demand at the beginning of an ICO helps the price spike a bit, while the later stages trigger a massive sell-off due to bad expectations. Similar to what happens when a large company conducts an ICO.
Therefore its quite hard to say which option is better in all cases. They both have their applications. Trading is good with established cryptocurrencies while investing is better with new or smaller coins.