Trading cryptocurrencies (or other crypto-related assets) is a lot different from how you would trade other markets like forex pairs, commodities, bonds, etc. The best forex or bond trader may perform poorly when it comes to trading crypto. The market dynamic is a lot different, it is driven by extreme greed and the risks are significantly higher when you trade crypto. The crypto market is largely unregulated, prone to manipulations and unwholesome practices.
Also, the crypto daily trading volume is relatively small compared to other markets (The crypto market’s daily trading volume is about $22 Billion compared to the Forex market’s daily trading volume is over $5 Trillion).
Here are 5 things you should avoid if you intend to trade crypto to earn some income.
1. A Pump and Dump
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. Over Leveraged Positions
It is very unlikely you see a 5 percent drop in the value of an asset in markets such as metal, commodities, bonds forex, etc. But in crypto, it is common to see a 15 percent drop in a trading day. Having such volatility in a highly leveraged product can easily wipe out your account. For a fact, if you are not a professional, avoid leveraged products altogether in crypto trading. They carry significantly more risks than are traditionally applicable in other asset classes.
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 on that particular 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 very 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.
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. For some comparison; here is a LIST OF THE BEST CRYPTO EXCHANGES AND THEIR TRADING FEES
5. Be Aware of the Risks in Swing Trading Shitty Tokens – 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 projects are led by shitty or outright scammers. (Again, because the crypto market is not regulated) Betting long-term on a token based on your technical analysis might not be the brightest idea if the token is doomed to collapse.
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, which are peculiar to the crypto market, and factor them 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 you trade crypto, 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.