Cryptocurrency is all the rage these days, and why shouldn’t it be? It has captivated investors and traders from all over the world. At the same time, it has left them confused due to its extremely volatile nature. There is a lot of hype surrounding cryptocurrency. You will remember the huge ‘Bitcoin” wave that had everyone scrambling to invest and trade in the cryptocurrency last year. If you are thinking about trading with cryptocurrencies, then there are some things you must educate yourself about before diving into the market.
What Is Cryptocurrency?
Cryptocurrency is digital money that is acquired through mining or trading from exchange websites. It is run on blockchain technology, which creates a shared ledge for all replicated, agreed, coordinated and joint data. You mine cryptocurrency using special software that solves arithmetic puzzles. When you get it right, you will be given an amount of coins, while transactions will be confirmed through blockchain.
Why You Shouldn’t Trade with Cryptocurrencies
It may seem reasonable or logical to start trading with cryptocurrencies, because it is the future, and eventually all trades will be digital. However, you shouldn’t place all your bets on crypto, because it isn’t a reliable trading vehicle yet. In fact, reliability and cryptocurrency don’t go hand in hand, as it is extremely volatile in nature and can be easily manipulated. All signs indicate that cryptocurrencies will be the future, but it will need a change from its current market behavior and develop certain characteristics to deliver consistency.
A lot of cryptocurrency enthusiasts believe that trading with bitcoins is the future and it isn’t a bad investment. However, all that only sounds good, and it isn’t backed by any economic principles, models, or investments. Their theory is based on widespread misinformation and the notion that it is a potent investment that will offer extraordinary returns in a short time.
Everyone remembers the price surge of Bitcoin and other cryptocurrencies in the latter part of 2017. The cryptocurrency was moving upwards at such a rapid pace that it was hard to resist putting money on it. However, there are legitimate reasons why you shouldn’t trade with cryptocurrencies yet, and we are going to cover them in detail:
One of the biggest drawbacks of cryptocurrency is its extremely volatile nature, which makes it impossible to maintain and control risk. As a trader, one of the most important rules to follow is related to risk. With cryptocurrency, the risk levels are off the charts! This isn’t new, as the cryptocurrency market has been volatile since its inception.
This makes calculating ROI on any investments made on cryptocurrency extremely difficult. The price of cryptocurrencies can swing up and down by hundreds of dollars in a single day! Many experts believe that the volatile nature of the cryptocurrency market isn’t going to change. It isn’t wise to trade with cryptocurrencies until it does and comes to a modicum of stability.
Vulnerable to Tweets/Rumors Manipulation
Another reason not to invest in cryptocurrencies is that the market is extremely vulnerable to manipulation. A single tweet or a couple of rumors can create absolute chaos and result in unexpected spikes or falls in the currency. This makes it extremely difficult to place a trade with any conviction involving cryptocurrencies, as the market changes continuously.
Different rates by different exchange houses
Like in Forex, cryptocurrencies are not being traded in one exchange. However, while in forex price rates and spreads are minor differences, for cryptocurrencies these differences can be huge. One of the biggest reasons not to invest or trade with cryptocurrencies is that it is still unregulated. Hence, it is open to all sorts of risks. There have already been cases of fraud where entire crypto exchanges were hacked, resulting in millions being stolen by hackers. All publicly traded stocks are backed by organizations that generate assets and revenue.
However, with cryptocurrencies, no one knows how they were created. Since it is unregulated by governments, banks or investment firms, it is completely different from other financial assets and investments. So, if the market collapses, you are taking all the risk. Adding insult to injury is the fact that you can’t get a refund or compensation back from a regulator because there are none with cryptocurrencies.
Lack of Regulation
The lack of regulation surrounding cryptocurrencies was used to promote it and is an integral part of its branding. However, when it comes to trading, you don’t want to trade with a currency that is not being regulated by any government, investment firm, or bank. This means that you can’t make any trades with real conviction. When you’re trading with unregulated assets or currencies, you’re playing with fire because there is high risk involved.
Same Currency on Different Exchanges Are Traded by Big Rate Differences
Even though some traders still think that cryptocurrency is a good long-term bet, there is nothing that can guarantee if cryptocurrencies will survive in the future. There are risks involved in trading on any cryptocurrency, even if it is here to stay for the long-term. There is a reason why institutional investors are holding back from investing or trading in cryptocurrency. Their reticence is due to the volatile nature of the market.
Prices go up and down in short periods, and there isn’t any downside risk protection with cryptocurrency. You need a robust liquid market for successful trading or investments, but only a select few unregulated cryptocurrency exchanges are trading with cryptocurrencies. They also have a history of insider trading, theft, and hacking, making it the worst environment for trading or investing.
It Is Not Being Really Adopted by Commerce
There are a lot of places that accept payments with cryptocurrencies, but hardly anyone is using cryptocurrency in the open market. A lot of businesses that do accept cryptocurrencies immediately convert it into local currency, which holds true value. This is done because of the massive fluctuations in the value of cryptocurrency; one of the main reasons why you shouldn’t trade with cryptocurrencies at this current time.
All successful traders and investors will tell you that risk management is essential for making solid investments. You shouldn’t be gambling when investing or trading, and with the extreme volatility of cryptocurrency, it is exactly what you are doing. You are taking big risks that can turn you from a hero into a zero extremely quickly. One minute you could be on top of the world, and the next moment your entire world could come crashing down around you.
Cryptocurrency is the future, and maybe it is going to be accepted by authorities and regulated by official banks. It may even be used in real commerce exchange, but the time hasn’t arrived where it becomes an investment vehicle for traders. The golden rule for trading is that you must always maintain control over the risk you can afford. If the instrument doesn’t offer you that, then you shouldn’t even think about putting it in your investment portfolio.
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