One of the most lucrative activities today is cryptocurrency trading. It involves exchanging cryptocurrencies with each other for a profit. It also means exchanging cryptocurrencies for fiat currencies. By buying low and selling high, you are able to get a positive margin. This form of trading is a simple way to participate in the world of cryptocurrencies.
There are two main strategies in cryptocurrency trading. These are margin and leverage trading. Margin trading is where you borrow the power to buy and sell in exchange for allocation of a part of your profit. In this strategy, you can only access your profit after returning the borrowed capital. Leverage trading is where you trade with an amount of money which you don't possess. In most cases, the leverage ratio is 1:10. In this arrangement, you receive 10 dollars to trade with for every 1 that you have. As a result, the levels of risk and reward are both high.
In crypto trading, there are two ways to participate in the markets. One of these is to trade cryptocurrencies that you actually own. The most popular example of such is Bitcoin. It is closely followed by Litecoin as well as a collection of other altcoins. The alternative is to trade in Contracts For Difference (CFDs). These allow you to trade without actually owning any cryptocurrencies.
Essentially the products of derivatives, they are contracts made between buyers and sellers. In this case, the sellers pay the buyers an amount equivalent to the change in value of the cryptocurrencies between the beginning and the end of the contracts. They make profits or losses based on the movement of cryptocurrency prices. The Contracts For Difference (CFDs) are more costly and less private than dealing with actual cryptocurrencies. However, they simplify the activity of cryptocurrency trading and provide a credible place to start for beginners in this market.
Cryptocurrency Trading Brokers
To participate in the cryptocurrency market, you can operate through a middleman. A cryptocurrency trading broker provides access to altcoins for those who do not want to buy them from an exchange. The brokers are more convenient than exchanges. They also offer personalized services to the traders.
Also referred to as Over The Counter (OTC) traders, they make it possible for interested individuals to begin participating in cryptocurrency trading as quickly as possible. Signing up in a cryptocurrency exchange requires thorough verification. This process can take days if not weeks. However, signing up with a broker can take minutes. This allows you to begin trading in a short period of time.
Cryptocurrency traders are often preferred over exchanges because they are less prone to price volatility. In an exchange, traders have to wait for other participants to match their buy or sell orders. However, cryptocurrency brokers will buy or sell altcoins at specific, fixed prices without negotiation, delay or argument. This convenience is provided at a premium of between 5% and 10%.
Pros and cons of cryptocurrency trading
They are creating positive reputations
Cryptocurrencies are building reliable track records. Having been around for a little more than a decade, these digital currencies are proving to be formidable, profitable competition to fiat currencies and commodities. Currently, the top cryptocurrency is worth more than an ounce of gold. Furthermore, it is increasingly being accepted in stores and e-commerce sites as a means of payment. This creates a good reputation for cryptocurrencies.
Offer great opportunities to hedge your portfolio
Cryptocurrencies are proving to be excellent hedges against factors such as government debt, quantitative easing by central banks and the dropping value of fiat currencies.
They provide unique solutions for real-world problems
Cryptocurrencies are providing solutions to real world problems. Whenever an economy is affected by very high levels of inflation, they provide a good hedge against the consequential drop in value of fiat currencies. Cryptocurrencies are also used to secure capital from leaving a country for example in the case of Argentina. This gives them intrinsic value which makes them prime opportunities for investment.
Plenty of momentum
While there may be major spikes and dips in the prices of cryptocurrencies, there is generally plenty of momentum pushing their overall value upwards. By relying on signals and profitable pairs, traders can catch this momentum and make profits by trading in cryptocurrencies.
Lack of enough statistical information
Cryptocurrencies have not been around long enough to provide reliable information for in-depth technical analysis. They do not provide enough data for the assessment of support and resistance factors. Their volatility and the relatively short duration during which they have been traded does not provide enough information for analysis of market psychology. Hence, they are risky instruments to trade in.
Too much effect by trends
Cryptocurrencies are heavily affected by trends. Upward trends make traders create strategies of buying and expecting profits. When the trend ends, the traders keep using the same strategy and lose consistently without knowing that their approach is incorrect.
Extremely high levels of price volatility
They have too much price volatility which causes high levels of uncertainty. If the price of cryptocurrencies is moving up and down too rapidly, it becomes difficult to find reliable spots for trading entry and exit. Furthermore, traders have less time to react.
They have no fixed market sentiment
Cryptocurrency markets have no fixed market sentiment. Uptrends in this market can remain sustained over long periods of time and then get cut short by abrupt changes in market sentiment. This abrupt changes can make it very risky to perform cryptocurrency trading.
Characteristics in the Cryptocurrency Market
The cryptocurrency market is disruptive in nature. With its ability to deliver high returns which are much more than anything that the regular stock market can offer, the cryptocurrency market is attracting new investors whose enthusiasm creates volatility that spreads into traditional, fiat currency markets. Cryptocurrencies are challenging the logic of long-term investing and providing financial benefit in short periods of time. Hence, they are defining a new age in the world of value trading.
It has a complicated valuation process
Establishing the value of assets in the cryptocurrency market is quite complicated due to factors such as changes in liquidity and price volatility. It is further complicated by a lack of long term background information. Many of the digital currencies being traded in the markets are less than 10 years old. Hence, there is little information about their long term performance for traders to rely on while making decisions in the market.
Valuation of cryptocurrencies is also made more difficult due to the inability of traditional valuation tools to work in this market. Strategies such as Discounted Cash Flow models do not work on cryptocurrencies. This is because the companies behind cryptocurrencies largely exist in the digital frontier and do not offer tangible products. In addition to that, cryptocurrencies are supported by whitepapers and attractive marketing. Thus, the functional utility of digital currencies is not stable making them very difficult to value.
They experience apocalyptic crashes
Cryptocurrencies are known for tremendous crashes. For example, Bitcoin dropped in scale from $230 to $70 overnight. This crash occurred in April 2013 and led to many investors suffering huge losses. The digital currency then took a total of 7 months to recover. This is just one of the many crashes that are experienced in the cryptocurrency market. As such, it can prove very risky to trade in.
Cryptocurrency risks and final thoughts
There are various risks involved in trading cryptocurrencies. If you trade directly through an exchange, it can disappear overnight. Any cryptocurrencies that you had saved within disappear along with it. Therefore, there is no investor protection in this market.
The government can abruptly make it illegal to trade in cryptocurrencies. This happened in China and many investors lost their money. As such, government control can spill over into the activity of trading digital currencies and cause massive losses.
The private key that you use to access the trading account can get lost, corrupted or stolen. There are entire teams of hackers who specialize in tracking down private keys and stealing them along with the cryptocurrencies stored in the attached accounts. Therefore, it is good practice to save this key in a place where it is safe and easily accessible to you.
The email and password combination which you use to access your cryptocurrency exchange account can be hacked and the information used at your expense. If you register through an unscrupulous website that targets cryptocurrency traders, your details can be recorded in plain text instead of getting encrypted. The malicious administrators of the website can then use these details to log into your account and sell off your cryptocurrency assets resulting in complete loss. This is especially rampant in exchanges that do not use two-factor authentication.
The extreme volatility of the cryptocurrency market can be used to disguise a pump and dump scheme. This is where a group of traders in an exchange can create an artificial upward trend to attract investment. After that, they can use the rising prices to recoup their initial investment. Having done so, they can then begin to sell off the same cryptocurrencies rapidly hence creating a downward trend. At this point, they can short the cryptocurrencies and make profits while other investors lose money.
Overall, cryptocurrencies are here to stay and provide attractive trading instruments. Despite being marred by risk, they have made many investors very rich. Therefore, if you perform enough background research, use a reliable cryptocurrency broker and only risk what you can afford to lose, crypto trading is a good way to make money today.