Digital currencies as an asset: how to avoid the pitfalls

By 2020 all of the bitcoin skeptics have understood: cryptocurrencies are neither a Ponzi scheme nor a short hype. They are investment tools for thousands of people, completely different from other financial tools. We’ve compared day-trading at a stock exchange and cryptocurrency trading to find out what are the key features of digital assets.

Apples and oranges

The difference between the two types of exchanges is obvious from the start.

  • The cryptocurrency market is available 24 hours a day. And all the stock exchanges have their owntrading hours. The usual trading session is 5—20 hours long. When trading on the equity market, traders may lose a large amount of money because rates change dramatically after the closing. This situation arose 20th of April: Moscow Exchange stopped trading when the price got to $8,84 per barrel. Meanwhile, the New York stock exchange was working, and WTI oil prices went into the negative segment. As a result, about 700 traders had tremendous losses ($1 500—200 000).
  • A commission fee for cryptocurrency trading at official cryptocurrency exchanges isn’t that big.
  • Cryptocurrency trader doesn’t need any working capitals. They can start from 0.001ВТС (about 10$). Obviously they won't profit much with this little money but they are free to try tools and strategies. Furthermore, an opportunity to get to the stock market costs tens of thousands of dollars.

The key features of digital assets

Nowadays, cryptocurrencies become more and more similar to securities. The volatility of digital assets is decreasing but trading tools, on the contrary, aren’t changing much. For example, in 2018bitcoin futuresappeared, and traders made extensive use of them. However, the difference is still significant.

Autonomy

Bitcoin and altcoins are able to rise when rates of gold, oil, and most of the liquid stocks fall. It’s the reason why many investors include Bitcoin in their portfolio — to diverse assets.

Volatility

Exchange-rate volatility is calming down at the moment. In 2020 no one can buy Bitcoin and double their investments a couple of months later. However, the rate of cryptocurrency is still fluctuating far more than the rate of stocks: Bitcoin volatility is as high as 7 % per day. It attracts traders but scales up risks.

The short lifetime of assets

If we compare top-20 cryptocurrencies in 2018 and 2020 year, we will see that many popular altcoins are out of the spotlight now. So trading on the cryptocurrency market is more profitable than the “Buy and Hold” strategy, especially for coins that aren’t on the top-10 of Coinmarketcap. For the record, Bitcoin was told to lose its place on the list in 2018, however, it’s still there — on the first position.

In comparison with securities, cryptocurrency is indeed a young asset. Still, it’s already got a different environment than all of the previous industries had: new exchanges are being opened, new gadgets are being designed, and apps/services for traders are being created right at this moment.