The Growing World of Cryptocurrency Trading

FOMO is an acronym gaining popularity in the Western world to describe the Fear Of Missing Out on something that others are a part of. It’s safe to say financial institutions have crypto-FOMO as practically all of them are starting to invest or have invested resources into blockchain technology, cryptocurrency, crypto trading platforms or some combination of the three. Individual cryptocurrency enthusiasts of all experience levels are leaping into the cryptocurrency trade market as more exchanges are created and as user interfaces improve.

Financial titans like Goldman Sachs were initially resistant to the idea of cryptocurrencies but many institutional investors have changed their opinions; No longer seeing them as scams but as revolutionary. The demand for cryptocurrency markets has exploded and has prompted tons of R&D into creating formalized software platforms that will allow cryptocurrencies to be traded within mainstream markets and decentralized exchanges.

Despite the SEC defining digital currencies as securities they aren’t the usual form that institutional investors are familiar with. The entire industry is scrambling to develop the most functional and popular cross-blockchain trading platforms before competitors.

Why Trade Cryptocurrency?

The high volatility of cryptocurrencies makes the potential reward of trading very high. The risk level is just as high, but price fluctuations occur with extreme frequency and those that can reliably foresee market trends have a lot of opportunity to profit. Some also bought cryptocurrency coins early and just held to their coins which turned very profitable in many cases. For example, despite the volatility those who bought Bitcoin early made a lot of profit by just holding throughout the years while ignoring volatility. The same could be said about many other coins, including the lesser known altcoins.

Blockchain technology offers the ability to move cryptocurrencies with low transaction and security costs and this high liquidity makes them attractive trade options. Amateur traders have been drawn to cryptocurrencies because access to marketplace platforms is often cheaper and easier than that of traditional trade markets. Another draw of crypto trading is the security provided by blockchains and smart contracting which minimizes the threat of hacks or information theft. Cryptocurrencies can also be used to directly buy goods/services so they have a direct utility, especially with Bitcoin which is obviously the most famously used cryptocurrency.

Cryptocurrency trade markets are flourishing in front of our eyes as new legislation, software platforms, and user interfaces are developed. Firms are working on the creation of new cryptocurrency exchanges while others are working to implement them into existing trade frameworks like the CME (Chicago Mercantile Exchange) and NYSE.

 

For institutional investors familiar with trading in financial markets cryptocurrencies have seriously appealing features. Unlike the NYSE cryptocurrency trading platforms are open to trade everyday of the year and at any time-day or night. This around the clock accessibility to the market allows hedge fund managers and other institutional investors to diversify both their own skill sets and customer portfolios while stock markets are closed for the day.

In many traditional trading and brokerage situations there are large minimum investments required to enter the market or to be a client of a broker. This diminishes access for the financially non-elite and highlights another perk of cryptocurrency trade: As systems become more user friendly and as more firms are familiarized with new software platforms the cryptocurrency trade market is positioning itself as a very accessible market for regular people in comparison to existing established trading markets.

Cryptocurrencies are also far more free from price changes caused by arbitrary geopolitical decision making as they’re not directly tied to states. Eliminating externalities like political influence helps prevent unforeseen price changes in the market. This independence from central authority also improves the efficiency of the market, adhering to the principles of the EMH hypothesis (Efficient Market Hypothesis).

Cryptocurrency is Infiltrating Trade Markets

The availability and legality of cryptocurrency exchanges depends on where you live. It’s difficult to outline general purchase and trade options because inevitably something will be different to some audience members based on their location. Some cryptocurrency brokers strive to cooperate with central authorities to minimize their own legal risk. Other motivations to be part of regulatory circles include receiving accurate knowledge about the future and to hopefully have favorable policy influence.

Brokerage regulations are being adapted in many places to define cryptocurrencies as securities, requiring brokers to obtain licenses. Trading cryptocurrencies on exchanges is becoming more accessible than in existing trade markets. People are often discluded from these centralized markets and as decentralized exchanges are developing more reliable options will become available to avoid central authorities. This will truly liberate cryptocurrency trading from the prying hands and eyes of the government.

In the European Union the agency CySec (Cyprus Securities and Exchange Commission) is helping protect traders with deposit insurance and they also aim to prevent dishonest brokerage with a licensing system. It’s pretty optimistic to witness increased utilization of cryptocurrencies as it indicates increased acceptance into the formal financial industry and eliminates legitimacy concerns that once delayed usage in the market.

Forex, the international market for currency trading, now has brokers accepting Bitcoin as payment. Cryptocurrencies are not traded on Forex however many institutions are predicting cryptocurrencies will find their way there eventually. The CME and CBOE (Chicago Board Options Exchange) are already offering cryptocurrency futures trading that are cash settled which means you don’t even need to be a coin holder to be a market player. Various types of crypto lending are offered to the public further signalling the rise of new cryptocurrency market offerings.

Leverage and margin trading options as well as CFD’s (contracts for difference) are becoming available which allow clients to trade cryptocurrencies and only possess a fraction of the amount they are trading-or posses none at all and leave that in the hands of the brokers and exchanges.

There’s also huge demand for decentralized trade markets offering independence from regulatory bodies. Countries like the United States have only officially legalized centralized cryptocurrency exchanges which is contrary to the integral values of cryptocurrencies. In many other regions decentralized exchanges are already operating but they are not without their own limitations. Similar to any other computer program it takes time for user interfaces to be optimized, and many of these technologies are less than 3 years old.

It also takes time for exchanges to begin accepting new cryptocurrencies while trust in them is established or broken. Even for coins deemed valuable there can be some delay for exchanges to implement them. In the future we don’t know if some governments will try to legally attack developers or users of decentralized trade softwares, but crypto actors will certainly attempt to circumvent any such actions.

Determine Your Risk Appetite

Predicting market trends in cryptocurrencies is difficult. Trading, especially day trading, can feel like a gamble as the ecosystem changes on a daily basis, meaning if you’re slightly late to adjust your portfolio you can underperform or lose money. Even if you’re aware of visible market conditions other variables and unanticipated external events can be very impactful. What happened with Mt Gox illustrates what can go wrong with hosting your coins on centralized exchanges- you are always dependent on its safety.

Some crypto ICO projects have protected themselves by forcing ICO buyers to hold their coins until a specified date. This sounds negative as it limits the investment liquidity in the short term but there are legitimate reasons to do this. While it’s beneficial to have users making transactions the requirement to hold new coins for a certain period after the ICO helps prevent pump and dump situations. You can think of this as a distillation of the investment pool isolating the long term supporters from short term traders.

Trusting your broker is crucial and if available regulated brokers are the safest option. Like previously mentioned CySec regulates brokers in Europe, and in Australia ASIC (Australian Securities and Investment Commission) regulates brokers through similar licensing procedures. Since the demand is rising for cryptocurrency trading there has also been a surge in broker review websites to educate people on who they’re trusting with their investment. You’re accepting more risk if you choose to trust non-legally approved brokers as there is no legal recourse in the event of a shut down or the broker fleeing.

Cold storage refers to an offline method of storing your cryptocurrency. It is generally recommended that most of your cryptocurrency funds remain in cold wallets or even paper wallets to eliminate the possibility of hacks. This is another way to feel more comfortable placing your trust with brokers since you can limit access to your funds.

One way to add insurance to cryptocurrency trading is to use Bitbay’s Marketplace Client. Our software uses built in smart contracting that you can use to outline and enforce cryptocurrency trades. When both parties already hold crypto, our double deposit escrow system ensures that it’s in both parties interest for the contract to be completed. Both parties make a deposit for an agreed-upon amount, and if a party doesn’t complete the funds transfer according to the contract the deposits are lost, making their cheating non-beneficial.

It’s also possible to do this in an asymmetrical fashion where only one party makes a collateral deposit, but this requires more trust as it’s asymmetrical. Thankfully Bitbay also has a built-in reputation system so the collateral deposits are not the only trust-creating mechanism.

A dichotomy is happening with the growth of cryptocurrency trading. Institutions and central authorities are motivated to incorporate cryptocurrencies into existing frameworks which they can regulate and monitor, while believers in the fundamentals of cryptocurrency are already dreaming of decentralized trading platforms that will liberate money markets from the chains of regulation.

List Image