The advent and prominence of blockchain technology have brought cryptocurrencies to the forefront, which also happen to be its most prized application. Unlike a few years back when the use of cryptocurrency was relatively unknown and possibly even unheard of to a layperson, it is quite the opposite scenario these days.
In fact, a lot more people have taken an understanding of what these cryptocurrencies are and the technology lying behind its operations. Naturally, many people have also started to take an interest in this digital form of currency, meaning there has been an increase in the value of cryptocurrencies.
Hence, cryptocurrencies are just like hot cakes when it comes to trading, with the possibility that it could actually redefine our financial system. A simple example demonstrates this fact. The price of a bitcoin was about $610 in October 2016. The same, at present, stands at a massive $4316. Now, that is a 607% increase over a period of just one year!
When it comes to cryptocurrencies, the number of traders that have been flocking to it has rapidly increased. And, a large part of these traders is retail traders, who feel that legacy markets have come to be dominated by investment banks and high-frequency algorithms. Hence, the migration has largely been to increase their win ratio.
However, despite the progress of cryptocurrencies, they are still considered to be relatively new. Hence, such markets are not dominated by institutional investors, who take little or no interest in them. On that note, the crypto market experiences massive gains and swings of volatility.
While this is considered to be risky for a risk-averse trader, seasoned traders can often have a field day in a market of this type, thus clocking immense gains!
Here is a list of reasons why the cryptocurrency market is believed to be the most profitable market to trade in:
It happens to be a free market with a lot of volatility
Cryptocurrency markets tend to largely operate in jurisdictions that have little to no regulations. This does come with downsides as insider trading, dumps, etc. are all possible to a large extent. Also, deposits that are held in these types of exchanges aren’t insured, meaning they could go blank.
However, this brings its own set of advantages too. Opportunities for profit in free markets can be immense. There are no circuit breakers in these markets, ones that prevent prices from going south. Traditional markets tend to have upper and lower circuit breakers that freeze prices when markets take a rapid turn.
However, in cryptocurrency markets, things just tend to play themselves out naturally in the case of a market crash. The volatility in such situations helps traders to take advantage of price inefficiencies that may be present.
Another major plus point is that crypto trading runs 24×7. A free market shows better price patterns that aid in trade analysis.
No involvement from high-frequency algorithms
Big investment banks are known to shell out millions of dollars as an investment in supercomputers. These supercomputers are known to run high-frequency algorithms that provide an edge over other traders. The algorithms tend to trade in microseconds, making it next to impossible for retail traders to match up to their processing power.
In fact, there are several ways that high-frequency algorithms manipulate systems. The most prevalent one among them is that of front-running trades alongside flash orders. In this process, investment banks have the power to intercept trades microseconds before they are processed and then sell them for more than the actual order. On a similar note, many of these algorithms purportedly work to disrupt price patterns such that it makes trade analysis difficult to carry out.
Individual traders compete with multibillion-dollar institutions in a legacy market. Being the bigger fish in the market, these institutions can hire full-time traders who are professionals and make use of supercomputers for trades. Small retail traders are therefore merely pawns in the big game as they do not have a lot of resources to compete.
Not related to other assets
A trader would very well know the importance of diversification when owning stocks. However, the prices of forex and gold do have a bearing on the valuation of stocks. This is where the price of cryptocurrency stands out. Historically, it has been found that there is no correlation between the prices of bitcoin and that of forex or gold.
It has even been observed that changes in interest rates by central banks do not have a bearing on the prices of bitcoin
Driven by dumb money
Cryptocurrency markets are known to be driven by dumb money. The term implies traders that are known to buy high and sell low. Traders here are known to chase money emotionally, thus buy when there is a spike in prices and even panic sell at losses when the market crashes. Such type of a market is easier to predict and is also volatile.
Most traders in crypto markets are non-professionals that do trading as a side hobby apart from their regular day jobs. Hence, such amateur traders have the tendency of making more emotional trades, thereby making mistakes that result in price inefficiencies. This can easily be exploited if you are a seasoned trader and know what to do.
The start process to crypto trading is also easy. Anyone with a few hundred dollars can start to trade, coupled with minimal requirements for registration. This results in more individual traders in the market and less of institutions.
Quick options for settlement and arbitrage
A trader would know that buying and selling of stocks come with a delay in the time for settlement. This often takes up to three days, depending on the depository that is processing the request. This delay is largely prevalent due to inefficiencies in the underlying technology.
Now, several companies have found a means to exploit this delay in settlement time by means of naked short selling. Despite not having borrowed stocks in the first place, they look at shorting stocks. This results in a damaging effect on the company’s stock as there is a lowering of its stock valuation.
With blockchain technology, the underlying concept behind cryptocurrency, settlement time only takes a few seconds. Also, there is no single cryptocurrency exchange that fixes the price of the bitcoins, but rather many exchanges having discrepancies in the price. This can lead to opportunities for arbitrage where a trader can buy cryptocurrencies in one exchange and then sell them in another for a higher price.
The above-mentioned reasons do enlighten us with the fact that cryptocurrency trading can be profitable for retail traders. Also, owing to the increasing demand for cryptocurrencies, mostly due to its varied applications, it has been dubbed as the currency of the future. Hence, any trader interested in making profits can harness the massive swings that cryptocurrencies bring with them.