While it may seem that cryptocurrency trading is an easy way to profit from the rapidly increasing value of digital currencies, it requires detailed knowledge of both the technologies and the assets involved. Investing in cryptocurrency consists of the risk of substantial loss, so it is imperative to fully understand the assets and technologies involved before investing.
While most states have regulated digital currencies, the U.S. has yet to do so comprehensively. In New York, BitLicense requirements require exchanges to register with the state, and only licensed companies may offer approved coins. Other states regulate cryptocurrency in some form, and thirty-one states are expected to consider digital currency legislation by the end of the 2021 legislative session.
Listed below are some of the essential aspects one should consider before investing in cryptocurrencies:
Don’t make emotional decisions
To avoid losses, traders should avoid using emotion-based trading strategies. Market liquidity refers to the number of active buys and sells orders at any one time. Moreover, understanding how markets function helps you minimise your losses while maximising your gains. Generally, buyers tend to set orders below sellers’, creating two sides in the order book. Hence, a low volume would indicate a low trading volume.
Understand that crypto trading is like gambling in sports
The underlying system of cryptocurrencies is similar to online sports betting but differs in several key ways. Unlike traditional assets, cryptocurrencies do not have physical value and are instead traded as derivatives based on their expected future value.
While cryptocurrencies do not have any intrinsic value, their price rises and falls on a constantly-changing demand cycle. Individual investors are unaware of where supply and demand end and are often caught in the middle of these cycles.
Cryptocurrency is highly addictive
Despite the low volatility, cryptocurrencies are a highly addictive form of investment. Cryptocurrency prices have far outpaced the stock market. For example, Dogecoin, a popular cryptocurrency, has never been worth a single dollar but has recently spiked to 72 cents.
Despite its high price, it has been used for illegal purposes and has even helped the recovery of the Colonial Pipeline, a major gas line in the U.S. East. The hackers held a ransom of $4.4 million in Bitcoin. Eventually, the U.S. government was able to seize the Bitcoin and recover the gas line. And although there is no formal regulation or regulatory framework for crypto trading, this form of investment can lead to destructive behaviors.
The price fluctuates due to several factors
The price of cryptocurrencies fluctuates based on several factors, including the economic and financial conditions in a particular region and currency. Moreover, since no central banks or governments are controlling the value of cryptocurrencies, they are volatile. The price of a coin depends solely on market activity. Furthermore, a single cryptocurrency can have exponential price growth.
It gives access to a broad market
In addition to providing payment mechanisms, cryptocurrencies are also a way for people to gain access to a rapidly-growing market. They have also helped create cryptocurrency exchanges and used in crowdfunding projects and ICOs. Bitcoin, the first cryptocurrency traded on an exchange, has a market cap of over $180 billion and is considered the industry’s gold standard. Although this form of investing isn’t for everyone, it does present many distinct advantages.
Dispersion in pricing
The dispersion in pricing between different platforms is a common issue in crypto-assets. In addition, the lack of detailed information on transactions can make it difficult to identify the underlying reasons for the price discrepancy. Furthermore, the growing number of crypto-assets poses new challenges for assessing their relative valuations. The ECB and other central banks are focusing on developing better indicators and harmonised data.
To sum up
In the past few years, the popularity of cryptocurrencies has become so high that a separate clinic has been set up to treat cryptocurrency addiction. The crypto market is notoriously complex and technical. An inexperienced investor could be easily duped into investing in a scam. However, trading cryptocurrencies can be a rewarding experience if one can afford it. With enough patience and the right approach, people can become wealthy by investing in crypto.