Cryptocurrency analyst. Founder and editor at btcpeers.com
Trading the cryptocurrency market can be an extremely lucrative endeavor if done properly. We all heard those stories of people making huge profits in a very short amount of time or with a little amount of money as the token they’ve invested some spare change skyrocketed over a period of a couple of weeks to extreme highs and made staggering returns. The promise of quick and enormous gains especially attracts the novice and those who would never even consider trading or investing which is why we have seen the creation of a great speculative bubble in 2017 when the mania was at its peak looking like everyone was an expert crypto trader. And it was as everyone is a genius in a bull market.
But that environment is an exception and not the rule. Skilled traders and professionals know that those kinds of stories and circumstances rely mostly on luck and hype and not on the knowledge and expertise. Yet still trading cryptos can be extremely profitable as the volatility is what drives this industry. But for people who have been used to trading traditional assets and are accustomed to certain standards trading cryptos still pose certain challenges and limitations to be considered a serious operation and not just a test of luck.
While the industry has grown in recent years to accommodate some of these needs like the invention of stablecoins to hedge the volatility and build a default safe heaven or exchanges having multiple order types so that you can have greater control over your entries and exits there are still a couple of key problems that the space needs to solve in order to get to the next level of the market maturity.
In this article we are going to cover 3 of the biggest ones and how far has the industry come to solving them.
Investing in cryptocurrencies usually refers to buying a coin that represents a project value and holding until it pays off for a long term. But if you are a trader one of the biggest edges is that you should be able to make money while the prices are falling and profiting no matter the market conditions and directional movement in the short-term. This is why people flock to trading in the first place so that they can be free from industry or company performance but rely on their skill and knowledge to make a living.
Unfortunately, there haven’t been many ways to do so. Sure you can engage in trading leveraged derivatives on Bitmex or even margin spot trading on traditional exchanges like Bitfinex or most recently Binance, but there are also a number of problems associated with this kind of approach.
The trading pairs are usually limited to Bitcoin, Ethereum, Litecoin, and a couple of the major ones so you can’t short the altcoin you know that going to 0 as developers have quit the project.
Second, those major coins are only paired against USDT which actually isn’t all that stable and whose value fluctuates but most importantly your gains fluctuate depending on the directional movement.
For example, if you short Bitcoin and the price depreciates you win a BTC gain but your overall holdings are still diminished as the value decreases. Or if the price increased and you went long yes your gain will be higher but your BTC denominated rollover fees would be higher as well.
Also setting your stop loss or take profit levels can be a bit sloppy as maybe there aren’t any buyers and sellers at your preferred price. This brings us to the next problem
We are relying on exchanges to introduce a trading pair and other buyers and sellers to provide liquidity in the order book. What if there isn’t a trading pair you would like to trade but know that it provides a good opportunity? Or you have an altcoin but you want to buy another some you have to spend double the fee to convert it back to BTC so that you can buy your desired altcoin. Or even worse you have to switch to another exchange that has your desired altcoin so you would have to pay the withdrawal fee as well as the deposit fee as well as the maker fee.
This ties into the liquidity issue: if there aren’t any market makers there isn’t a market e.i a trading pair.
One of the interesting solutions to this problem has been brought forth but an exchange 50x.com. Unlike a traditional exchange where it is up to market participants to create the market through entering their orders in the order book, this exchange uses what they call “Any2Any Quantum Trade Core” which doesn’t rely on the order book for liquidity and instead “operates with liquidity vectors and graphs which allows to instantly reflect all available liquidity in a currency relative vs any other currency on the exchange.”
These developers have thought of a way to apply the disruptive blockchain principle relying on math to solve complex issues. This is why their quantum trading core technology holds not only the promise of revolutionising the way people interact with exchanges but changing a century-old paradigm.
With the invention of blockchain technology in combination with the rise of algorithms and AI there isn’t any more need to rely on traditional matchmaking mechanisms, as the tech offers a promise to disrupt the middleman. This innovation can easily be translatable back to the traditional markets and we might see it being implemented and used for potentially other things then trading pairs but everywhere where the matchmaking is involved - real estate, workforce marketplaces etc.
Trading major cryptos you might not experience much slippage but depending on the market conditions, the exchange you are using your purchasing/selling power or how in a hurry you are even that can pose sometimes a challenge.
Trading altcoins is far worse. Usually, the smaller the cap the higher the slippage. You can, of course, enter a limit order and wait but it might not get filled, and especially if you are in a hurry to use a trade opportunity it can be a huge problem and the coin might just start getting away from you at price, so you lose your entry.
Low liquidity issues have been attempted to be solved by partnerships, inventive programs or even in the case of Kyber Network eliminating the order book completely but ultimately there still hasn’t been a good and reliable solution to this problem.
These two problems just add up to the sloppy experience and professional traders know that every miscalculation in percentage can shift his risk/reward ratio into an unfavorable one in the long term. This brings us to our third key problem that some of the novices don’t even take into consideration.
Certainly, there are major advancements in the solutions to the problems we have outlined for a professional approach to the cryptocurrency trading, but it appears that the demand for more stable and precise products has to arise for the key market players to start developing and implementing solutions that endorse a more mature approach to this activity. It has come a long way from it’s starting year’s that’s for sure so there’s no doubt in my mind that it is going to improve but outlining these problems and pointing them out is the first step towards creating the investors and traders demand for more reliable features and products.
Disclosure: I don't have any vested interests in any mentioned projects
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