Many investors that want to enter the cryptocurrency market have never traded any form of financial instrument before. Most of them, however, have some form of knowledge of the stock market. Using lessons learned from the stock market and applying them on the cryptocurrency market is not necessarily a smart move though. This blog post will outline a few differences and similarities between shares traded on the stock market and cryptocurrencies and their respective trading environments, and hopefully give you an overview over what to think about when comparing the two.
First of all, an unescapable similarity between shares and cryptocurrencies is that the value is what another person is prepared to purchase the share/crypto for. If the stock or crypto price is USD 10, and a seller suddenly wants to sell for USD 100, then the value is USD 100 as soon as such seller finds a buyer. So, in a sense, the only thing that really matters is what other buyers or sellers in the market are willing to buy/sell for. Unlike for cryptocurrencies, however, there are several different ways to value shares. The most commonly used valuation methods are the following.
P/E Ratio: Market Value per Shares / Earnings per Share. By performing that division, you will arrive at a PE-number. If the PE-number is 20, that means that an investor is willing to pay 20 times the earnings per share to acquire one share. In order to know whether a company’s PE-number indicates that you should buy or sell the share, you must also know the PE-number for comparable companies in the same industry.
Net Asset Value per Share: Net Asset Value or NAV is essentially the accounting value of a firm, calculated by adding up its assets and then subtracting liabilities and intangible assets such as goodwill or brand value. Effectively, it is what shareholders would own if the company were wound up and its creditors repaid. If a company’s share price is less than its Net…