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Today cryptocurrencies hold a market cap of about $300 billion with a potential to reach $10 trillion in the near future. There are currently 1500+ cryptocurrencies and an endless number of crypto tokens out there. The rapid growth of cryptocurrencies has attracted traders worldwide. However, cryptocurrency trading differs from the traditional investment processes such as stock exchanges. Today we will talk about what these distinctions are and what to expect when starting to trade cryptocurrencies.
Making profits on traditional exchanges is difficult
With traditional exchanges, it can be difficult to commence trading. There are a lot of hurdles with substantial amounts of paperwork and associated costs before the first trade can be executed. Even after all this work, making a profit will be a long-term process, requiring initial capital for things such as margin and trading fees. There will also be significant effort required for the analysis of news, certain business models and staff, worldwide and local economic and political trends and indicators, such as signs of a recession.
In contrast, you can dive into crypto trading with as little as $100 worth of cryptocurrencies, allowing you to take advantage of a market which is often much more volatile than traditional regulated finance, but that provides more opportunities to earn greater profits. Volatility is the two sided coin of the crypto market, offering the potential for profits and losses in equal measure.
It is easier to start crypto trading
We’ve mentioned the paperwork to be done if you want to start trading using a fiat exchange. This is due to traditional finance being a highly regulated industry all over the world. Companies offering trading services, require a great deal of information and sometimes even a declaration of “professional investor” status, which adds further levels of cost and delay. For example, with a fiat stock exchange, you will need to sign an agreement with a broker-dealer firm to gain access. Obtaining a broker account may be hard, as such companies implement many time-consuming procedures and demand large deposits.
As of today the crypto market is mainly unregulated. There are some requirements in different countries, but currently no global standardized regulations, best practices, or clear rules to follow. However, this is changing. In the meantime it is far easier to start trading crypto, not only because you will need less capital to have a chance at seeing some profits, but because the paperwork to start trading is often simpler and less time consuming with no requirements for intermediaries such as brokers.
The disadvantage to counter all of the simplicity and low cost is greater risk. In the past the crypto exchanges have been subject to a number of weaknesses. They have been hacked, failed due to hacking, been mismanaged, had a weak business plan, or simply been found to be fraudulent with customers losing their funds. However, the number of such incidents seems to be decreasing over time.
“Trading sessions” vs 24/7 operation
Another important difference between fiat and crypto exchanges is their availability for trading. Traditional exchanges have their own trading sessions, with few providing 24 hour access. This means that you can only transact within certain timeframes (say, from 10 am to 7 pm) with no trading during state holidays or even weekends in most cases.
Hence, events that occur in real life outside of these timeframes have no instant impact on the market. Only at the next trading session will this influence be reflected (or not). This means that your last transactions made before the closing of the exchange may contradict the new trend that will be “played” at the opening. This makes planning harder, and this is why many traders prefer not to hold any open positions between trading sessions, closing them and opening the next day.
On the other hand, crypto exchanges work 24/7 and instantly react to any event. So if you are fast enough, you can make profits via the news. But it also means that you should be online almost all the time, or you risk missing out on opportunities. In this case, you will need to take some steps towards preventing the loss.
Final thoughts: fighting volatility
As it can be seen, the crypto market offers some valuable opportunities for traders. It is much more volatile than fiat exchanges and this factor creates investment opportunities but also introduces a higher risk of losses. However there are some tools that help lower this risk.
One such tools is the soon-to-be-launched Cryptoindex platform. It includes its own, first-ever AI-powered cryptocurrency market benchmark Cryptoindex100 (CIX100) which works similarly to the S&P500 or Nasdaq Composite fiat market indexes. The platform automatically creates a crypto portfolio by using an algorithm called Zorax which run the coins through numerous rules and filters to ensure that only the highest quality cryptos with a solid track record are chosen. The index is then maintained and rebalanced to ensure that the ongoing make-up of the portfolio meets these high standards, while providing the best opportunity for performance against the markets’ individual coins. Such clever automation helps crypto investors to identify promising assets (find the next Bitcoin!) and lower the overall portfolio volatility, thus reducing investment risks.
The Crypto market is becoming more and more mature and as it does more flexible than fiat exchanges. As there are more and more tools than fiat investors are used to, the crypto market will become a more valuable alternative to traditional finance.