The benefits and risks of trading Crypto
The cryptocurrency market is a recent financial market – recent compared to centuries-old securities markets like the London Stock Exchange (LSE) – which has risen rapidly in popularity.
Cryptocurrency trading has propelled to the forefront of many trader’s portfolios in recent years, but with any form of trading, comes with its own unique benefits and risks.
What is cryptocurrency trading?
Cryptocurrency trading works by trading digital currencies on a decentralised market.
Since they operate on a digital peer-to-peer system, crypto exists in digital wallets for traders to exchange. The exchange works via one crypto trader selling their currencies, and another purchasing them on the receiving end, with the entire trade operating on a virtual blockchain.
This method is known as buying and selling via an exchange. An alternative method which is offered by Skilling is to trade Crypto with contracts for difference (CFD) which many investors opt for.
This involves purchasing contracts mirroring the underlying cryptocurrency, as opposed to owning the asset itself, which allows you to speculate on the price movements of the market, and profit from accurate predictions. Your position – either long (buy) or short (sell) – will close with either a profit or loss, depending on the difference in value between the entry and exit of the contract.
What are the benefits and risks?
Crypto trading comes with a host of benefits and risks, which each trader has to consider before pursuing it as an addition to their investment portfolio.
Benefits of trading Crypto
Opportunity for high rewards
Crypto markets have a high volume of transactions daily, based on a supply and demand structure. One trader requires the cryptocurrency, and another possesses it to sell to them. With this process, it leaves opportunity for high rewards, since a supply and demand market can produce substantial returns at certain times.
With the right combination of supply and demand, a particular asset could rise exponentially in a short period, leading to a successful trade with huge profit.
Another reason many traders opt for crypto investments is due to the digital security of the virtual blockchain. The markets are decentralised, and exist on digital servers which each trader connects to when making their transactions. This results in every transaction and investment having a clear digital trace.
Everything is trackable and easily identified, with your assets being traceable at all times. Also, the cyber security of these digital markets is always evolving, to prevent the disruption of hackers or cyber theft.
Unlike many other markets, the crypto markets operate 24/7, meaning there is round-the-clock opportunity for trading and making profitable transactions.
Regardless of your time zone or personal trading schedule, crypto traders can make trades whenever they see fit, and can even profit from trades outside the usual trading hours.
Risks of trading Crypto
High market volatility
Crypto markets are often highly volatile, which although can mean potential for profit on one hand, it also means your trades are susceptible to rapid, sudden changes.
There may be many instances when the price of an asset drastically moves, and a significant price swing causes you to incur losses. These movements are often out of your control, meaning you must be cautious when trading on such highly volatile markets.
A market in infancy
Crypto trading is one of the newest forms of trading in the financial world, coming into fruition in 2008. Although the market appears popular and profitable at its current stage, this form of trading hasn’t yet stood the test of time, resulting in less confidence as to how the market may be performing in years to come.
Well-established markets such as the stock or foreign exchange (forex) market can elicit more confidence in traders to make long-term investments. Overall, crypto trading has yet to produce the same effect.
There are huge amounts of self-risk involved in crypto trading — which is why inexperienced traders should be wary of investing in this market. Despite blockchains being highly secure, where you store your digital currency can be vulnerable to online attack.
There is no compensation for a trade that failed due to technical issues with your digital wallet, or stolen funds. Crypto trading, potentially more than any other type, relies heavily on maintaining full control of your trading experience, and managing your own self-risk.
Crypto trading is both a complex yet widely used form of trading. So, you can use what you’ve learned in this article, to make an informed decision as to whether crypto trading will be a wise addition to your portfolio.
Not investment advice. Trading cryptocurrency may not be available depending on your country of residence.
If you want to start investing in the financial markets you need to understand the meaning of the words ‘Bull’ and ‘Bear...
Candlestick charts are many traders’ favourite way of looking at price movements of a share or commodity. Let’s take a c...