Using cryptography for its security, it manages the creation of new units and verifies the transfer of assets. Cryptocurrencies are digital assets designed to serve as a medium of exchange. Unlike traditional currencies, cryptocurrencies are decentralized, meaning they are not controlled by governments or financial institutions. Consequently, they are attractive to many investors who wish to avoid traditional investments on Wall Street. The question is, however, whether cryptocurrency trading or investment is the best option for you. Here’s what you should know.
It is generally accepted that there are two main options when it comes to cryptocurrency: trading and investing. The two have advantages and disadvantages of their own. Let’s look at each one in turn.
Trading cryptocurrencies is similar to trading foreign exchange in that you speculate on a currency’s price fluctuation. In an effort to turn a profit, you can purchase low and sell high or the opposite.
The key distinction is that, when trading cryptocurrencies, you speculate on the price movement of digital currencies rather than fiat (or currencies backed by the government).
Cryptocurrencies are highly erratic, and their value can change drastically. This makes them a prime target for day traders who want to benefit quickly from slight price changes.
Despite this, it should also be noted that cryptocurrency trading is a highly risky investment. It is a highly volatile market in which prices can fluctuate widely during a short period of time. Therefore, it’s important to note that this type of investment has potential risks and rewards.
Importance of Liquidity When Trading Crypto
Trading any asset requires liquidity, but it is especially important for cryptocurrencies.
The price of cryptocurrencies can change significantly over brief periods of time since they are frequently more volatile than regular markets.
It may be challenging to purchase or sell cryptocurrencies at a reasonable price due to this volatility. You could have to pay more to get the currency you want or accept a lower price when selling if there isn’t enough crypto market liquidity.
It is therefore important to choose a cryptocurrency exchange with high liquidity. Market liquidity refers to the number of buyers and sellers interested in trading at close to the market price that is currently in effect. Liquidity for crypto exchanges is therefore essential to their survival.
Binance and Coinbase, two of the most popular cryptocurrency exchanges, provide a high level of liquidity.
Benefits of Trading Crypto
Trading cryptocurrency can be useful for a number of reasons:
Because they are digital, cryptocurrencies are easier to transmit than conventional money. They don’t require a middleman, like a bank or other financial organization, and can be sent electronically from one person to another.
Cryptocurrencies are decentralized, which means that neither the government nor financial institutions have any influence over them. This can offer some anonymity and ensures that the system won’t collapse if one single point of failure occurs.
Since cryptocurrencies are distributed worldwide, anyone can utilize them. They are, therefore, perfect for transacting business internationally.
The value of cryptocurrencies can fluctuate considerably since they are frequently more volatile than traditional currencies. Traders that are able to benefit from the volatility may find this useful.
Lastly, investing in cryptocurrencies might be a great strategy to diversify your risk and portfolio. Compared to many other asset groups, they might provide larger yields but also carry higher risks. As a result, they can aid in portfolio balancing and assist lower overall risk.
The Dangers of Trading Crypto
Trading cryptocurrencies involves a lot of risk. Many investors have lost money investing in digital currencies due to their extremely erratic price movements.
Before you begin trading cryptocurrencies, you should be aware of the following risks:
We already stated how unstable the prices of digital currencies are. This implies that their prices can fluctuate sharply, and you can rapidly lose funds if you’re not attentive.
Cryptocurrencies are often associated with scams. In the recent past, there have been many fake ICOs (initial coin offerings), and many investors have lost money on them.
Due to the fact that cryptocurrencies are kept in digital wallets, they are vulnerable to hacking. Cryptocurrencies that are stored on exchanges or in online wallets are at risk of being stolen by hackers.
There is no regulation of cryptocurrency in most countries at the moment. The result is that you are not protected if you lose money when trading them.
You may have to pay capital gains taxes if you make a profit from trading cryptocurrencies. Before you begin trading, it is important to be aware of this fact.
Investing in Crypto
Although cryptocurrency trading is generally considered short-term, it is also possible to hold cryptocurrencies for longer periods of time. In this case, it is referred to as investing in cryptocurrencies, and if carried out properly, it can be a worthwhile endeavor.
Trading and investing in crypto require completely different approaches. You invest in coins with the intention of holding them for a long time, not caring about fluctuations in price on a day-to-day basis.
Investing in a coin you believe will increase in price over the course of time could be a great way to earn money. Nevertheless, as with any investment, it is important to keep in mind that losing money can occur if the price falls.
The following are some factors you should consider if you are considering investing in digital currencies:
Digital currencies are a risky investment, as we have already mentioned. They are highly volatile, and there is a possibility that you might lose money if you invest in them. Before investing, ensure that you understand the risks involved.
Your investment goals
How do you intend to benefit from investing in digital currencies? Are you looking for long-term growth or short-term gains? You will be better able to choose which currencies to invest in if you understand your investment goals.
Your risk tolerance
What level of risk are you comfortable taking? Due to the considerable risk involved, you should only invest money that you can afford to lose in cryptocurrencies.
Your time horizon
When is it necessary for you to achieve your investment objectives? Long-term investing allows you to take on greater risk. Nonetheless, you’ll need to be more cautious if you want to accomplish your goals swiftly.
Exchanges and digital wallets usually charge fees when investors invest in digital currencies. Before investing, ensure that you understand the fees involved.
Researching and understanding the risks involved with any asset is essential before investing. The situation is particularly critical when dealing with cryptocurrencies, which are high-risk and highly volatile investments. In spite of this, investing in digital currencies can provide excellent opportunities for making money if they are handled properly. Just be sure that you are aware of the risks prior to beginning.
Importance of Liquidity When Investing in Crypto
In order to achieve the best results with digital currencies, it is essential to consider liquidity as one of the most important factors.
In general, some coins are easier to buy and sell than others because they are more liquid. A good example of this is Bitcoin liquidity, which is higher than that of most altcoins because Bitcoin is the largest and most popular cryptocurrency.
In spite of this, the fact that a coin has a higher liquidity does not necessarily make it a better investment. To determine whether a coin is a suitable investment for your portfolio, you should conduct your own research.
It is generally recommended to look for digital currencies with a large market capitalization and that are traded on multiple exchanges. A combination of these factors indicates that the price will remain stable as long as there is enough interest from buyers and sellers.
The lack of liquidity can be a problem for investors who wish to cash out their positions quickly. For instance, you may have to wait longer to find a buyer who will pay the price you want if you invest in a less popular coin and then decide you want to sell it.
Benefits of Investing in Crypto
You may be interested in investing in digital currencies for a number of reasons.
The first advantage of crypto assets is that they are capable of generating high returns. The price of Bitcoin has soared by more than 1,000% since the beginning of this year, for example. The market capitalization of Ethereum, the second largest cryptocurrency, has risen over 3,000% in the past year respectively.
There is no guarantee of success in the future based on past performance. But if you’re seeking a type of asset that might result in significant returns, you might think about cryptocurrency.
Being relatively young and having little competition from institutional investors are two additional benefits of investing in digital assets. Large institutions have largely remained out of the picture. Individual investors like you and me make up the majority of cryptocurrency buyers.
This might change in the future, but for now, it offers individual investors an opportunity to participate in the creation of a potentially game-changing asset class.
Cryptocurrency investing also doesn’t require a lot of your time. After doing your research and deciding which coins to purchase, you set your orders and leave them to run their course. Since you aren’t concerned about making quick money, you don’t need to follow the charts or the candles as they rise and fall.
It is also important to note that technology is still relatively new, and there is a lot of uncertainty about what the future holds for digital currencies. This means that if the industry is expected to continue to grow, prices could potentially rise significantly.
Disadvantages of Investing in Crypto
Naturally, there are some risks to take into account before investing in digital currencies.
The first is how volatile cryptographic assets are. This implies that prices might change drastically in a short amount of time. For instance, from its peak in December 2017 to its low in February 2018, Bitcoin experienced a decline of more than 50%. Since reaching an all-time high in January 2018, Ethereum has decreased by more than 70%. In more recent times, Bitcoin has experienced a significant decline, going from $69,000 to $18,000.
Investing in digital currencies may not be suitable if you are not able to handle the volatility.
Cryptocurrencies are still largely unregulated, which is another risk to consider. There are no real protections in place, so if there is a problem, you are on your own. As an example, lost coins can’t be replaced if hacked or scammed.
It is also necessary to have some technical knowledge when investing in digital currencies. For instance, you need to be aware of the best way to store your coins. If you fail to do so, your investment may be compromised by hackers or thieves.
Last but not least, there is always the possibility that the entire industry will collapse. There is a possibility that the crypto market will see a major shakeout as weak coins and projects are forced out. Despite this apparent impossibility, it’s important to remember that the crypto industry is still in its infancy.
So, Should You Trade or Invest in Crypto?
It really depends on what you want to accomplish and how much risk you want to take.
Trading digital currencies might be the right move if you’re looking to make quick money. However, if you are looking to build a long-term portfolio, you might be better off investing in crypto assets.
Naturally, you do not need to make a choice between the two options. The two can be done at the same time! Just be sure to conduct your own research before making any digital currency investments or trading.