Overview
Trading cryptocurrencies (or other crypto-related assets) is very different from how you would trade other markets like forex pairs, commodities, bonds, etc. This blog post highlights some of the pitfalls of trading cryptos. It discusses 5 top things you should avoid when trading cryptos.
So, whether you are a professional trader, especially in other markets like Forex or you want to venture into crypto trading, you will find the following highlights useful.
Characteristics of the Crypto Market (Trading)
Before we begin, here are a few things you should know about the cryptocurrency market, especially in comparison with other markets.
- The crypto market is very volatile – it is not unusual to see a 10 percent + drop or rise in the price of an asset in a day.
- The risks in trading cryptos are significantly higher than what you will normally see in other instruments like Stocks, Commodities, and forex currency pairs. Conversely, the rewards are great too.
- The market is smaller and the trading volume can be very low in some crypto trading pairs.
- The market is largely unregulated and there are a lot of scams in the industry.
- The trading crypto daily trading volume is significantly smaller when compared to other markets. The crypto market’s daily trading volume is about $50B – $100B compared to the Forex Market’s daily trading volume of over $5 Trillion.
5 Pitfalls of Cryptos Trading- Things to Avoid
Here are 5 things you should avoid if you intend to trade crypto to earn some income.
1. A Pump and Dump Scheme
This is the process of artificially manipulating the price of an asset – In this case, a cryptocurrency. They are illegal in the stock market but very common in crypto markets. The crypto market is mostly unregulated and such activities are not grossly not monitored by exchanges.
There are many groups on Discord and Telegram channels promoting a pump-and-dump scheme. While it is the dream of every good trader to catch some volatility, the volatility you see on a pump and dump is artificially created and manipulated by a small group of persons to turn the tide against you.
A pump and Dump will do damage to your trading account. Jumping in on a trend that has made 400 percent in the last 1 hour is often a recipe for disaster because the gains can be lost in just a minute by those doing the dumping.
2. Leveraged Positions
Unless you are a trained professional, it is best to stay away from highly leveraged crypto products – (futures, margins, cross-margins, isolated margins). This is because the crypto market is prone to manipulation, high volatility, and relatively small volume. It is easy for the market to swing sharply in an unfavorable direction, wiping you clean in a single sweep.
A 15 percent Swing in the value of cryptocurrency is not unusual in crypto trading. Such high volatility in a highly leveraged position can easily wipe out your account.
Some exchanges such as Bybit.com can offer a 100x leverage for bitcoins. It means a 1 percent change in the value of Bitcoin will wipe out your trading account. The daily average fluctuation in the price of Bitcoin is more than 1 percent.
The below shows the Bitcoin Volatility chart for 1 month. These values are even greater for other crypto assets.
Volatility is a good thing for trading, but you shouldn’t trade it with an instrument that is over-leveraged. Account blowout under such is common.
3. Low Volume Exchange
If you trade considerable size, you want a place where you can trade your tokens with enough volume. You might want to enter or exit a particular trade, but you may not get enough volume in that specific exchange.
There can be huge disparity in the price of a crypto asset across different exchanges but the more important factor will be if there is enough volume on the exchange to trade the crypto.
A 1-bitcoin order can significantly alter the price of an asset on some exchange while it remains the same on the exchange. Ensure you trade on exchanges with significant volume for the asset you are trading.
It is also a good idea to only trade tokens that have significant trade volume so you don’t end up becoming a bag holder of crypto tokens that are difficult to trade.
4. Avoid Exchanges With High Trading Fees
The goal of trading is to make profits on the difference between the price at which you bought a token and the price at which you are selling it. Trading fees can be significant with trading crypto and may even determine whether or not you are profitable.
Some popular exchanges can charge as high as 0.5-1.0 percent to allow you to trade your crypto – that is a round trip of 1-2 percent on your trading amount. It will be difficult, if not impossible to make a profit using those exchanges for your professional trading.
Trade with exchanges offers cheaper fees while not compromising on the quality of service delivery. Also, take advantage of discounted trading fees offered to professional traders who meet certain criteria such as staking the native tokens of the exchange.
Trade with exchanges offers cheaper fees while not compromising on the quality of service delivery. Also, take advantage of discounted trading fees offered to professional traders who meet certain criteria such as staking the native tokens of the exchange.
For example, the Binance exchange trading fee is typically 0.10 percent, there is a further reduction of 40 percent of the fee if you decide to choose to pay your trading fees with BNB- their native token.
5. Be Aware of the Risks in Swing Trading “Shitcoins” – Long Positions especially.
Prices can change quickly in crypto and dramatically in crypto, and as such increases the risks on swings. One thing you should be mindful of if you intend to trade crypto is that a lot of scam projects. Again, because the crypto market is not regulated.
The true value of many shitcoins is zero, holding on to them when you trade is not a bad idea. Trading a coin led by a fraudulent team is also a major pitfall.
FTX token sold at an all-time high of about $81 before the infamous collapse in 2022. The current price is about $1.42 (as of July 2023)
A lot of tokens go to zero all the time, be aware of that and take your trades accordingly. If you must take a long-term position, understand these nuances peculiar to the crypto market. Factor these into your trading plan- especially if you are going long on a position with substantial capital.
Conclusions
The cryptocurrency market is different from the different traditional asset classes. It is mostly unregulated and carries significantly more risks – and rewards. When trading cryptos, you should Avoid Pumps and Dumps, Over-leveraged positions, low-volume exchanges/tokens, and high trading fees. Only take calculated risks when you Swing trade on fairly long intervals.
Also see: TOP 10 REASONS WHY A CRYPTO EXCHANGE MAY FREEZE YOUR FUNDS
