Cryptocurrency trading has been a hot topic in the past decade, with many traders finding success in the market. These days, there are still many new joiners who decide to participate in trading. If you are one of them, you should arm yourself with sufficient information before making any decision.
In this article, we will discuss the pros and cons of crypto trading, based on its market and product characteristics. We will also go through the factors you must consider if you want to trade crypto.
Types of cryptocurrency investments
To begin with, you must know there are different types of cryptocurrency investments. In other words, there is more than one way to invest in crypto, though people may only picture the buying and selling of coins. While you can buy and sell coins, you can also buy stocks related to crypto, trade crypto CFDs, and more. Knowing how each type of product works will help you make a distinguished decision.
Pros of investing in cryptocurrency
There are reasons as to why crypto investments are so popular and why so many people continually trade them. Some of the most common ones are:
A decentralised exchange
Traders trade crypto on a decentralised exchange. As there is no one single entity (such as a central bank) controlling the exchange, it makes it easier for participants to establish and influence the market themselves. This lowers the risk of organisational interference.
A form of portfolio diversification
Cryptocurrencies offer an avenue of portfolio diversification for those who are already trading other stock, forex, and other instruments. Cryptocurrency coins themselves also have relatively few ties to the performance of other markets. This means that when other markets are underperforming, there will be little to no effect on the crypto market. This makes it an extremely effective diversification tool.
Many coin types to be traded
There are also many coin types when it comes to crypto, despite its relative novelty compared to other investments such as forex, stocks, and indices. In fact, there is a growing trend in new coins and coin forks every year. This gives traders plenty of opportunity to find the coin they most want to invest in.
Some examples of important cryptocurrencies this year are the ever-reigning Bitcoin, as well as popular runners-up Ethereum and Tether. More examples include Dogecoin, Binance Coin, USD Coin, XRP, Solana, and Cardano. The variety of currencies makes it flexible for people to trade according to their preferences and within their budgets.
Risks of investing in cryptocurrency
However, crypto investments are not without risk. In fact, there are some unique risks that crypto traders face that people new to the game may not know about. Below are some considerations you must take into account when deciding whether to trade crypto for more details: Saxo bank
A decentralised exchange
While it can be a good way to trade, with minimal interference from any one entity, traders may also find a decentralised exchange a risk. This is because there is no singular regulatory body for cryptocurrency trading. In fact, there are many different local authorities that regulate trading, which makes it difficult for traders to fully understand what is going on in the market.
When there are steep crashes, the lack of interference also means all your investments can be wiped out in one fell swoop with no backup. This makes it much riskier than investing in regular products such as stocks, and it can create hesitancy in some people.
Broadly speaking, cryptocurrencies are a sentiment-driven product. This means that the main influencer of coin prices is how investors feel at that time. This depends on what tech giants are saying and how investors in general think the market will go. This can be a risky investment for traders, as it makes it even more difficult to predict how markets will behave.
Rapidly fluctuating markets
Combining the first two characteristics that crypto trading carries, it is not a big surprise that crypto prices fluctuate frequently and greatly. It is more difficult for traders to consistently predict where the market will go for crypto, which heightens the level of risk they take on when they buy coins.
How to figure out what works best for you
When you are considering whether to trade crypto, you may take the following factors into account:
- Your budget
Firstly, you must be clear and transparent with yourself about your budget. Some coins are more expensive than others. Others may also be more difficult to buy, with lower liquidity – which may bring you trouble if you prefer short-term trading or expect to be able to turn your investments back into cash quickly.
- Your trading schedule
You can trade cryptocurrencies 24/7 online. Therefore, trading schedules of crypto traders do not have to be as strict. However, there are still times when trading volumes are higher for certain coins. For example, the North American East Coast and Western Europe overlapping period sees many traders. This can influence how you decide to trade.
- Your preferred cryptocurrency to trade
Picking an instrument to trade is crucial. Remember that ‘cryptocurrency’ is not a monolith – there are always going to be differences between coins and how they behave. You should also take into account a coin’s liquidity (supply and demand) and make sure it suits your trading method.
- Your trading strategy
A trading strategy is the technique you will use to enter and exit markets. It dictates what you will look out for and how you will execute your trades. In crypto markets, many traders rely on a mix of different trading strategies and incorporate both technical and fundamental analyses to manage the fast-moving, sentiment-driven markets.
- Your broker
Not all brokers offer crypto trading. Among those that do, not all offer the specific coin you would like to trade. You should make sure your broker offers the instruments you want to trade at a reasonable price. This means investigating their fee structures, as having high trading fees can really eat into your profits if you are not careful.
It is advisable to work with a reputable and reliable broker. This can be a local broker from the MENA region or an international one with a local presence. A good example is Saxo Bank, with decades of experience and a wide variety of cryptocurrencies available for trading.
- Your trading objectives
Finally, your trading objectives will tell you whether you are suitable to trade crypto. What are you looking to achieve with your investments? Are you looking to make profits in a short period? Or are you looking to grow your investments long-term. Many traders believe that the rapid fluctuations in the crypto market make it a great avenue to trade and profit short-term, while long-term investors prefer to stick to more traditional products.
To that end
At the end of the day, whether you trade crypto or not is a personal decision. However, one thing is for sure: if you do decide to trade, ensure that you do sufficient research before deciding on an instrument. You should also make sure you understand how to trade and stick to strategies you are familiar with.
If you would like to try out trading, you can set up a demo account to practise. This can give you the experience you need in the unpredictable crypto markets, and you will be able to trade live with more confidence and knowledge.