Cryptocurrency trading involves buying and selling digital or virtual currencies, such as Bitcoin, Ethereum, and Litecoin, in order to profit from price fluctuations. These currencies use cryptography for secure financial transactions and are decentralized, meaning they are not regulated by any government or financial institution. However, crypto traders must follow local trading and taxation rules when they buy and sell crypto or crypto derivatives.
If you are thinking about trading crypto, it is worth thinking about the pros and cons before doing so. You should also consider your trading objectives, budget, and lifestyle. This way, you can have a comprehensive view of what it means to trade crypto and whether you should do so.
Pros of trading crypto
Crypto’s popularity has been skyrocketing in the past few years, and many traders believe it is justified, due to its huge potential for profit and secure technology. Below, we explore several advantages of trading cryptocurrency.
Potential for high returns
Cryptocurrencies are known for their volatility, which can lead to significant price fluctuations over short periods of time. This volatility can create opportunities for traders to buy low and sell high, potentially resulting in large profits.
Decentralization
Cryptocurrency exchanges are decentralized. This means they are not controlled by any central authority, such as a central bank or an international organization. This can make the exchange more resistant to censorship and other types of market manipulation. It also means that traders are freer to trade Peer-to-Peer without an intermediary, which can save on time and costs.
Accessible
Cryptocurrency trading is typically done through online exchanges or brokerage platforms, which are easy to use and accessible from anywhere with an Internet connection. Most platforms only require traders to verify their identity with a photo card ID, which makes it simple and straightforward. There may also not be any minimum deposit requirements depending on the platform and/or brokerage you choose.
Good diversification tool
Many traders who participate in crypto trading also participate in other markets, such as stocks and forex. When they trade crypto, they can cultivate a diverse portfolio simply because the performance of cryptocurrency markets has little to no relation to how other markets perform. For example, how Bitcoin is doing does not affect how companies in the manufacturing industry perform at all. This makes it a good way to lower overall trading risk.
Cons of trading crypto
However, there are also several disadvantages to trading cryptocurrency. Below are some of them:
High risk
Cryptocurrencies are highly volatile, leading to greater market risk due to unpredictable fluctuations. The lack of a central body of regulation also makes it a security risk for traders. However, as mentioned before, traders must still follow and comply with local regulations when they trade crypto. Traders can also limit high market risk by trading only what they can afford to lose and using suitable risk management techniques such as stop-loss orders.
Price manipulation
The decentralized nature of cryptocurrencies also means that it can be difficult to know who is behind price movements. Some traders may use tactics such as wash trading or spoofing to manipulate prices and take advantage of other traders. Others worry about ‘crypto whales’ (individuals that own a large quantity of a certain type of cryptocurrency) having too much power when it comes to influencing the market.
Security risks
Additionally, traders may worry about security risks due to the relative novelty of blockchain technology (in the context of crypto trading) and crypto wallets. These platforms may be vulnerable to hacks and other security breaches, which can result in the loss of funds. It’s important for traders to use secure exchanges and to take steps to protect their accounts, such as enabling two-factor authentication. It is also vital for traders to never share their account keys with anyone to lower security risks.
Limited acceptance
Finally, one downside to trading crypto is that there is still limited acceptance within the world when it comes to how much crypto can do and should be worth. While more and more businesses are accepting cryptocurrencies as a form of payment, they are still not widely accepted. This can make it difficult to use cryptocurrencies in everyday transactions, especially for long-term traders who own large quantities of cryptocurrency. However, in a liquid market, these coins can always be sold for cash.
Ensuring you make the most of your trades
If you have made up your mind to trade crypto, it is essential that you understand how to create an account with the right brokerage. This can set you up for success in the long term and help you meet your financial goals. Below are some tips on some things you should look out for if you are just starting out:
Find a brokerage that suits you
One of the most important partners you will have when you trade crypto – or any product – is your brokerage. You should ensure they do not charge hidden fees, and that their fee structure suits your trading style. For example, if you plan on scalping crypto, you may want to search for a brokerage that offers a sliding-scale commission structure for high-frequency traders. This way, you may even get to save on trading costs in the long run.
Of course, you should also ensure that your brokerage offers the instruments and products you want to trade, including any derivatives such as Crypto CFDs or Crypto Futures. You should also make sure that the brokerage you work with is regulated by local financial authorities. Finally, if you intend to use any automated trading tools or third-party plugins when you trade, remember to check that your brokerage platform is compatible with them.
Understand how the market works
Another way to make the most of your trades is simply to understand how the market works. You should know all there is to know about the specific cryptocurrency you are trading. For example, are there any major traders that own a large number of coins? What tends to affect its price performance? How has it performed, historically? When is the market most active?
Doing your research ahead can guide you to make better trading decisions. It will also help you figure out if an instrument is right for you at all.
Know how to trade
Finally, you should know how to trade. This may seem like a no-brainer. But there is a technique when it comes to trading. Traders can hone their skills by learning about how technical and fundamental analyses work. They can better their performance by picking up skills over time.
Even though many people believe that crypto prices are unpredictable and there is no underlying basis for how a coin performs. There are still considerations every trader must make. To be successful, you must at least know when to enter and exit markets, and how long you should hold instruments. Most importantly, how to set up automated trading algorithms if needed.
The bottom line
Overall, trading cryptocurrency carries both pros and cons. While it can be a great tool for diversification and can yield high profits for traders, it can also cause traders to lose their funds if they are not careful. There is great importance in gaining a solid understanding of the risks and strategies of trading first, before attempting to dive right in. For a smooth experience at getting started, Saxo bank is highly recommended.
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