Investing in Cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in Cryptocurrency. Should you decide to invest in Cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.
The cryptocurrency market can be a confusing place. Whether or not you choose to buy something like Bitcoin, an understanding of how the market works can be extremely useful.
We’re here to break things down and explain everything you need to know about the cryptocurrency market.
An overview of the cryptocurrency market
In this article, we focus on the whole market. If you want a better understanding of the currency itself, take a look at our article covering cryptocurrency basics.
While there may still be questions around whether cryptocurrency is safe, it’s still a market you should familiarise yourself with.
In the last ten years, the amount of money in the crypto world has skyrocketed. The current total market capitalisation is just over $1 trillion. Calculating the market cap of a cryptocurrency is done by multiplying the price by the total circulating supply.
This sounds like a lot of money, but in the context of the whole financial system, it’s still pretty small. To put things in perspective, the market capitalisation of gold is around $10 trillion. Also, there’s an estimated $11 trillion of investments tied to things like index funds tracking the S&P 500.
Regulation of the cryptocurrency market
Rather than printing money or issuing stock, fresh cryptocurrency can enter the market through a process called mining.
Usually, finance products have to be approved before going to market. Because cryptocurrency is open-sourced and digital, it’s released into the world without pre-approval.
Regulating the market is difficult. It’s a global system that everyone can access using the internet. There is no international consensus about how to handle it.
It’s a new frontier, which is why it’s sometimes called the wild west of finance. Regulators like the FCA are currently playing catch-up after the cryptocurrency market got a significant head start.
However, there’s likely to be lots more regulation in the next few years, especially if buying cryptocurrencies like Bitcoin remains a popular choice.
Cryptocurrency’s relationship with the stock market
For some, cryptocurrency represents an alternative financial system. Because of this, you’d expect a clear relationship between the crypto and stock markets. For example, when the stock market crashes or drops, investors look towards something like cryptocurrency to make money instead.
However, the two are forming an unusual relationship. During the March 2020 crash caused by the coronavirus pandemic, the price of things like Bitcoin actually plummeted as well.
As stocks bounced back, so too did cryptocurrencies. This was partly due to people using some of their profits from buying shares to purchase cryptocurrency. It was also because of fears that economic stimulus and big injections of cash would lead to inflation. Cryptocurrency operates outside normal financial constraints, so the cryptocurrency market is an appealing place for investors to hedge against inflation.
Things always make more sense in hindsight. The truth is, it’s impossible to predict what the cryptocurrency market is going to do simply by comparing it to movements in the stock market.
Next steps for the market
This market is still in its infancy. There may be plenty more room for growth, but there’s still a long way to go before it becomes a significant space in terms of market capitalisation.
Future regulation and tax might also act as roadblocks. It will be interesting to see how the market develops over the next few years.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.