Cryptocurrency is a digital asset designed to serve as a medium of exchange. Unlike traditional assets, it uses cryptography to verify and secure its transactions. Cryptocurrencies are decentralized, which means they are not controlled by governments or other financial institutions. This makes crypto investing and trading appealing to people looking to escape traditional Wall Street investment options. But what would be better: to trade cryptos or to invest in them? Here are some things you need to know.
Trading Cryptocurrencies
As with Forex, cryptocurrency traders are speculating on the direction of a currency’s price. In other words, traders buy when prices are low and sell when they are high.
The value of cryptocurrencies fluctuates widely, which makes them ideal for day traders looking to take advantage of small price changes to make a quick profit.
However, you must remember that cryptocurrencies are high-risk investments. Price swings and market fluctuations can be wildly unpredictable. Therefore, there is a lot of potential for both losses and gains.
How Liquidity Affects Cryptocurrency Trading
Trading financial instruments are difficult without liquidity, and cryptocurrency is no exception.
The market volatility of cryptocurrencies is often greater than that of traditional markets, meaning that their values can fluctuate considerably in a short period of time. A lack of crypto market liquidity can make it difficult to buy or sell cryptocurrencies at a fair price, which may result in higher prices for buyers or lower prices for sellers.
Because of this, it is imperative to choose a cryptocurrency exchange with a high level of liquidity. Having sufficient liquidity means there are many buyers and sellers on the market, and they are all willing to trade at a price close to the current market price. As a result, liquidity for crypto exchange is crucial for it to survive.
High liquidity can be found on some of the most popular cryptocurrency exchanges, like Binance and Coinbase.
Advantages of Trading Crypto
Cryptocurrency trading is beneficial for several reasons.
- Unlike traditional currencies, cryptocurrency can be instantly transferred between individuals without the involvement of a third party, such as a bank.
- Due to their decentralized nature, cryptocurrencies can provide some anonymity, as well as the security that no single point of failure will cause the whole system to collapse.
- The global availability of cryptocurrencies lets them be utilized by anyone, anywhere in the world. They are perfect for international trade and transactions.
- The value of cryptocurrencies can change quite dramatically, which can benefit traders who can take advantage of these changes.
- A trading cryptocurrency can help balance your portfolio. It is possible to earn higher returns with cryptocurrency than with other asset classes, but the risks are also higher.
Risks of Crypto Trading
It is important to understand that cryptocurrency trading is a risky endeavor. The rates for digital currencies are highly volatile, which has led to many investors losing money trading them.
Investing in cryptocurrencies comes with several dangers:
- Volatility
Investing in digital currencies involves high volatility. This means that their prices can rapidly rise and fall, which means you may lose money very quickly.
- Scams
The cryptocurrency industry is plagued with scams. There are many fake initial coin offerings (ICOs), which have caused many investors to lose money.
- Hacks
If you store your cryptocurrencies on an exchange or a wallet online, you run the risk of being hacked and losing your money.
- Regulation
As of now, cryptocurrency trading is unregulated in most countries, so you won’t be protected if something happens.
Investing in Cryptocurrencies
In addition to trading, cryptocurrencies can also be bought and held over the long term, which is known as investing in cryptocurrencies. The approach of a crypto investor is very different from that of a trader. An investor buys cryptocurrencies with the intention of holding them for a long time without worrying about price fluctuations.
It can be a good way to make money if you believe the value of a particular coin will increase in the long run. However, investing is a risky business, and you may lose money if things go wrong.
Consider these considerations if you want to invest in digital currencies:
- The risks
It is important to keep in mind that investing in digital currencies can be risky. The prices of digital currencies are volatile, and there is a risk that you could lose your money. Make sure you are aware of your investment risks before you make a move.
- Your investment goals
Do you have a specific goal in mind when investing in digital currencies? Do you want to gain short-term gains or grow your portfolio over the long run? Investment decisions will be easier if you understand your investment goals.
- Your risk tolerance
What is the level of risk you are willing to accept? It is highly recommended that you only invest what you will be able to lose since cryptocurrencies carry a high level of risk.
- Your time horizon
Do you have a deadline for reaching your investment goals? If you plan to invest for the long-term, you can afford to take more risks. If you’re looking for quick results, you’ll need to be more careful with your decisions.
- The fees
Before investing in digital currencies, be sure to understand the fees involved. Many exchanges and digital wallets charge fees.
Cryptocurrencies are extremely volatile and risky investments. However, if done correctly, they can be a fantastic way to earn money. Therefore, before investing, one must research and understand all the risks involved to maximize profits.
How Liquidity Affects Crypto Investing
The liquidity of digital currencies is a vital aspect of investing in them.
Buying and selling certain cryptocurrencies is easier than others. Bitcoin liquidity, for instance, is the highest one among coins because it’s the largest and most popular crypto asset on the market.
The fact that a coin has more liquidity does not necessarily mean it is going to be a better investment. You will need to conduct your own research to decide whether a coin is a good fit for your portfolio.
Generally speaking, you should consider digital currencies that can be traded on more than one exchange and have a large market capitalization. These factors indicate that there is enough interest from both buyers and sellers; therefore, the price of the coin is likely to be sustainable.
It can be difficult to sell a coin if it has low liquidity. For example, if you invest in a less popular coin and then decide you want to sell it, it may take you a long time to find a buyer willing to pay you your preferred price.
Advantages of Crypto Investing
Digital currencies are worth investing in for a variety of reasons.
The first one is that crypto assets offer high returns. Bitcoin, the second-largest cryptocurrency by market capitalization, has soared more than 1,000% in the previous year. Ethereum has grown over 3,000% in the same period.
There is no guarantee that past performance will repeat itself in the future, but crypto is worth considering if you are looking for an asset class with large potential returns.
There are also other advantages to investing in digital currencies, including the fact that this market is still relatively new and isn’t competitively dominated by institutions. Most crypto buyers are individual investors and traders, whereas large institutions have not yet entered the market.
Although there is a possibility that this may change in the future, it still gives individual investors a chance to get in on this potentially revolutionary asset class as early as possible.
A good thing about crypto investments is that they don’t require much time and effort from you. Once you research and decide which coins to buy, the only thing you need to do is set your orders and let them be. Charts or candles are not necessary for you since you do not seek short-term profits.
Disadvantages of Crypto Investing
Digital currencies are, of course, subject to some risks.
First, crypto assets are extremely volatile. This means that prices can rise and fall rapidly in a short period of time. For example, Bitcoin fell more than 50% from its all-time high in December 2017 to its low in February 2018. Ethereum is down over 70% from its all-time high set in January 2018. More recently, we have seen a big drop from $69,000 down to $18,000 for Bitcoin.
The volatility of cryptocurrencies means that the price of an asset can rise and fall very quickly in a short period of time. For example, Bitcoin fell nearly 50% in December 2017. Ethereum has dropped 70% from January 2018’s all-time high. In 2022, Bitcoin’s price dropped from $60,000 to $20,000. Investment in digital currencies is not for you if you aren’t comfortable with volatility.
In addition, the crypto industry is still largely unregulated, meaning there are no real protections should something go wrong. It is impossible to recover coins lost in hacks or scams.
A solid understanding of technical aspects is also necessary when investing in digital currencies. For instance, hackers and thieves could steal your coins if you don’t store them safely.
As a final consideration, the entire crypto industry could collapse. While it may seem unlikely, the crypto industry is still in its early stages, so it is possible that we will see a major shakeout as weak projects and coins are thrown off of the market.
Is it Better to Trade or Invest in Cryptocurrencies?
Your answer will depend on what you are trying to achieve and how much risk you are willing to take.
For those looking to make quick profits, you might be more interested in trading cryptocurrencies, but if you’re interested in building a long-term portfolio, then investing in crypto might be a better choice.
The choice is up to you – you might as well do both! Before investing or trading, be sure to do your own research and make sure that you know what you are doing.