Rapid growth and public awareness of cryptocurrencies have attracted the attention of traders worldwide. However, there are differences between trading traditional investment assets on stock exchanges compared to trading cryptocurrencies. Earning profits on traditional exchanges if far more difficult, and there are hurdles to cross regarding costs and paperwork before that first trade can even be executed. Once trading begins, profiting is a long-term process that requires initial capital for margin and trading fees, as well as the effort for analysis.
Crypto trading is a whole different gig. You can start trading instantly with as little as $100 worth of bitcoin and take advantage of market volatility on almost a daily basis. That volatility can work for you or against you, offering huge potential for both gains and losses. Traditional trading is highly regulated and requires significant paperwork to get started, not to mention the need for a declaration of “professional trader” status by some services. The crypto marketplace is currently still unregulated and while there are increasing KYC requirements, no global standardized regulations exist. You need less capital and the potential to see some profits instantly exists in part because you can begin trading instantly.
That said, simplicity comes with a price and that price is a greater risk. Those willing to take the risk can profit greatly in these early days before regulators get their hooks into the crypto space. Market inefficiencies are more pronounced and can be easily spotted which creates more opportunity for investment strategies to earn some healthy returns. Buying and selling based solely on expected price changes are fundamental to trading, and price changes are fundamental to cryptocurrencies. In the crypto market, traders concentrate on the intraday, ultra-short-term moves and speed is key to perfecting strategies.
In traditional markets, the key gatekeeps are the broker-dealers through which all public market orders flow. While fees charged by brokers before the Internet have dropped, their income now comes from selling large market-making firms the opportunity to trade against unsophisticated retail market participants. This results in predominantly sophisticated institutional order flow on exchanges, making profitable trading more difficult.
In the crypto markets, there is an absence of broker-dealer and clearing houses, which means order management is performed by the investors themselves. The settlement is done either by the exchanges or smart contracts on DEXes (decentralized exchanges). While this may not last long, it is currently the situation good or bad and hard to imagine broker-dealers will ever be as entrenched as they are in traditional markets.
Another huge difference is that crypto exchanges trade 24/7 with no closing time like traditional markets. This tends to keep real-life events during the closing time from having an instant market impact as is the case in crypto markets. In the crypto space, the news gets an instant reaction and if a trader is quick, they can profit. Unfortunately, this also means traders must be vigilant around the clock or risk missing opportunities.
The crypto market’s higher level of volatility creates opportunities as well as higher risks. That will change as companies start moving in, but meanwhile, first movers are positioned to earn outsized returns. This will inevitably attract new entrants and increased competition will drive down returns. There was a time, fifteen years ago or so, when you were able to execute arbitrage opportunities manually in traditional markets. Even when significant news events hit, a trader had time to react and make a profitable trade. As electronic trading was ushered in, the “easy money” was gobbled up by high-frequency trading firms.
How Long Will It Last
The crypto market currently resembles the way traditional markets operated 15 years ago, generating returns unthinkable in traditional markets. There are few entry barriers and when the professional traditional market traders feel the regulatory environment is clear to move into crypto, their skills and experience will give them an instant advantage.
Given bitcoin and some altcoins have outperformed most market expectations, there has been a huge increase in interest for investors. The 2008 crash was in part due to the reliance of packaged investments which were obscured from those investing in them. Cryptocurrency is a return of investments to the people – for now. Increased competition will drive down average returns, stabilize volatility, and push the weaker traders into unprofitability and it will happen in far less than 15 years.