While cryptocurrency continues to increase in popularity among investors across the globe, the volatility of digital currencies makes them difficult to trade successfully, even for experienced traders.
The attraction to crypto currency remains obvious: the possibility of large returns. But Matt Choi, the founder of Certus Trading, an online trading education platform, said success in crypto trading still isn’t that different from successful trading with the Stock Market 1.0.
It’s all about doing your homework.
“There are tons of people trying to figure out how to invest in cryptocurrency, but many of them don’t even understand the fundamentals of trading on traditional stocks,” Choi said. “Crypto currencies certainly prevent unique challenges, but the overall picture looks pretty similar to what’s happened in the past: traders trying to get rich quick instead of taking the time to learn the ropes.”
Lack of understanding clearly hasn’t stopped investors from trying. Despite widespread acknowledgement of the market’s high volatility, more and more investors continue to join the bandwagon.
In the U.S., 23 million people now trade crypto currencies. That number continues to grow despite the fact that many potential investors are unaware of the huge variety of such assets available — or how they even work.
Here’s a few things to keep in mind if you’re looking to trade crypto in 2022.
Regulations Are Coming
As cryptocurrencies have exploded in popularity over the last few years, governments and financial institutions have finally started to take them more seriously — and begun attempts to regulate the industry.
While many advocates of digital currency aren’t happy about the possibility of regulations, it’s a good thing in the long run, Matt Choi says, because regulations will improve protections for investors and reduce risks.
“Nobody likes the word regulations, but a completely unregulated market is ripe for fraud and outright theft, as has already happened repeatedly in the crypto marketplace,” Choi said. “I think we’ll see lots of new regulations in 2022. Investors who stay on top of those changes and trade accordingly will do better than their peers who ignore or avoid them.”
Types of Risk Involved
There are two types of risk involved with trading crypto currencies: systematic and unsystematic.
Systematic risk refers to the risk inherent to the entire market, or a segment of the market, according to Investopedia. That means it affects the overall market, not just a specific stock or industry. Crypto currency is a major example of this.
Unsystematic risk is specific to crypto assets, and often means a change in the company’s fundamentals. Both of these risks are present when investing in crypto.
“You can make money with crypto currency investments,” Matt Choi said, “but you have to be very careful and you have to do your homework, even more so than with traditional investing.”
Anyone paying attention to crypto news over the last few years understands that the digital nature of these currencies makes them particularly vulnerable to cyber attacks.
Ransomware attacks and unusual disappearances both represent common and severe threats to the continued evolution of the marketplace and the ability of investors to succeed within it.
It’s not a dealbreaker, but again, it requires investors to pay attention to the level of security offered by the companies and coins they choose to invest in. Those with a higher level of protection from these crimes are more likely to reward the investor over the long-term, Choi said.
“Crypto currencies are a fascinating new trend, and I don’t think they’re going anywhere,” Choi said. “However, investing in them requires a high degree of nuance and understanding. I’d recommend lots of homework and careful, patient investing for anyone entering this space.”