Why you shouldn't trade crypto (yet)

The risks and pitfalls of trading crypto

Crypto is obviously here to stay. This is great and I fully support the idea, but in terms of where you trade your money, consider the following points on why crypto isn’t the most reliable way to grow your trading pot. Assuming you know how to properly secure your wallet and are careful about where you trade and exchange, you still need to consider:

Liquidity

Or the size of the markets. A little tricky to measure the 1000s of different coins on aggregate but the site coinmarketcap.com measures total capitalisation to be at over $285bn, with 57% of that being BTC-related. That’s over 19k markets and 2200+ currencies. Daily volume traded is ~$50bn.

This is compared to the foreign exchange market with around $5tn traded per day. Or around 100 times larger on any given day. That’s good for stability, especially on the major pairs, as well as slippage (ability to get the price you ordered on entry and exit).

Given the existence of HFT (high-frequency trading - sub-second trading) in stock and forex markets, liquidity is as good as it has ever been there. This isn’t possible with cryptocurrencies in their current state with transaction times extending well beyond what’s required for HFT. Maybe in the future.

Regulations

Regulation is the antithesis of what CC is about, yet it’s what you need if you want to recover broker-induced losses like exit scams, inability to execute orders, administrative errors etc. With forex trading through regulated brokers (FCA, ASIC, FINRA) you get some recourse if your broker goes rogue. Ask what happened to folks who lost balances at Mt. Gox (7% of all BTC in existence stolen), Bitstamp, Bitfinex etc.

Rogue brokers and exchanges

Over recent decades, forex brokers have been exposed for a number of shady practices. Even regulated forex brokers are known to trade against their clients, removing any edge you might have had. Some become unavailable the minute there is a strong move and volume increases. And this is with regulation. Just imagine it without. Full-on stop loss hunts, trading volume restrictions, slippage etc. all go in broker’s favour as they bleed inexperienced accounts dry.

With no recourse. Not to mention when they literally just disappear with all account deposits. Imagine sinking any significant amount of your net worth into an exchange or three only to see it whittled away and stolen while you try to trade sensibly.

Hype-driven

In CC there are no real fundamentals to tie movement to, just hype. In Forex you’d look at the underlying economies to take a long-term position, or at least to inform a day-trade. In crypto it’s still driven by hype alone. Waves of popularity are not the easiest thing to gauge, and the support/resistance levels mean much less when bull or bear runs are pushing the price in crypto – there are no institutional investors checking and balancing each other in the same way.

You also get a lot of hindsight charting from people new to trading through crypto. Cherry picking charts has always been easy. CC is comparatively immature as a market and trading community as you see the same mistakes made their by so-called experienced traders as you do in new forex traders.

Forex communities have been around for decades, and most experienced particpants have a much better idea of what the usual scams and red flags are when discussing strategies, results and brokers.

Brighter future

It all depends on increased volume and liquidity, regulation improvements of some description for protection, improved transaction times and more maturity in the communities. I don’t see that happening this year or next.

What if it’s fun money you happen to have come across in last bull run? Yeah sure, risk some of it incase the next run really does go to the moon. But this post was just to make you aware that your account balance is way more at risk in crypto than it would be in, say, forex.

As ever, join the chat through the link below to discuss this, and similar topics.

Thanks for reading. I do translation from French and Swedish to English, so if that's useful to you, feel free to connect and message me on LinkedIn or Twitter.

Published by and tagged automation, forex and personal-finance using 675 words.

Next:
Previous: