Cryptocurrencies in the stock market are in fear of bubbles. However, why does the value of these currencies rise remarkedly?
Several cryptocurrencies, including bitcoin and ether, have hit new highs this week. Whether it’s due to inflation fears, fiat currencies, investors are betting big on alternative currencies. We’ve talked about the industry previously, but we’re going to take a risk and link cryptocurrencies to stock markets. The majority of stock market participants are concerned about cryptocurrencies.
“It’s a bubble,” they exclaim, and perhaps it is. “It drains funds from the stock market,” they claim, and this is accurate, with the total market cap of all cryptos reaching $3 trillion this week. However, we will argue that cryptos are beneficial to the stock market. In many respects, bubble or not, they make the stock market appear good.
Let’s take a look at five of the below reasons.
Tangible ownership of cryptocurrencies in the stock market
Because the whole point of blockchain accountability is to establish that you genuinely possess the coins you claim to own, we could receive some criticism on this. Perhaps in the sense of computer code, in bits and bytes. Stocks, on the other hand, indicate ownership in a company. If you hold shares in Cineplex Inc., for example, you sit in a movie theater of which you own a portion.
If you hold Starbucks stock, a small portion of the earnings from your morning coffee finds its way back to you. This is real ownership, and stocks appear to be a better option than a cloud-based ledger. This tangible ownership is accentuated whenever a cryptocurrency fraud occurs. Tokens vanish for whatever reason, as has happened several times over the last decade.
Cash has created new highs in the stock market.
Whether it’s a bubble or not, most cryptocurrency players would agree that one of the causes for recent record prices is a large amount of cash circulating in the banking system. All asset values have soared as a result of people being stranded at home and unable to spend money over the past two years, and governments throwing money around.
Excess cash also finds its way into the stock market, which has been hitting new highs regularly this year. It seems to reason that if alternative currencies, which have a very short history, can set new highs, equities, which have a 200-plus year history and performance, should profit from the extra cash held by investors.
Volatility raises the value of cryptocurrencies
Because of their volatility, investors tend to devalue stocks. When equities fall in value, investors expect to be compensated more for their investment. When compared to the volatility of cryptocurrencies, which may go up or down 50% in less than 24 hours, the ups and downs of equities seem delightfully benign. If numerous investors believe equities are less volatile than other assets, it stands to reason that stocks can rise.
Scams are effectively resolved
We’ll use non-fungible tokens (NFTs) and cryptos to illustrate this idea. Another hoax surfaced in October, with the creators of Evolved Apes fleeing with millions of dollars, leaving investors in the dust. “A collection of 10,000 distinct NFTs locked inside a lawless land,” according to Evolved Apes. It stated they were “fighting for existence,” and that “only the strongest ape would prevail,”
There have been a few stock market frauds recently. At the very least, the market is controlled. Sure, you might lose money, but losing money to outright fraud is quite unusual. When you acquire a coin, especially an NFT, you are exposing yourself to the risk of being cheated. Stocks are safer and worth more in terms of valuations if traded on a controlled exchange with brokers, regulators, and bankers.
Dividends have increased
Limited supply, at least at the individual token level is touted by crypto supporters as one of their virtues. Because of the scarcity, purchasers will have to spend more to collect a large number of coins. On the other hand, public enterprises produce real value, not merely because their stock prices rise.
Profits grow, dividends are paid to employees, suppliers are given contracts, and wealth is built for all shareholders, not only by flipping a coin to another investor prepared to pay a higher price. Companies can repurchase their stock, pay many dividends, or go private, buying out their shareholders.
Cryptocurrencies and non-fungible tokens can’t accomplish any of these things, and the only way to profit is if someone else pays more for your coins than you did. Again, the prospect of dividends, buybacks, or takeovers implies that stocks should be worth more, and this may be one reason why stocks continue to rise – they appear to be a better investment than the alternatives.
akaChain is backed by FPT Software, a globally leading technology, and IT services provider. It is an end-to-end, permissioned, multi-chain network based on the Hyperledger Fabric. Since its establishment in September 2018, akaChain’s product has assisted many enterprises, from SMEs to Fortune 500 firms, to transform with distributed ledger technology. The company provides a broad range of permissioned blockchain-based products and services in multiple sectors, including retail, supply chain, banking and finance, insurance, shopping mall management, etc. to transform with its distributed ledger technology. For more information, please visit https://blog.akachain.io/
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