The goal of any professional trader is to diversify his investments in order to spread the risk across a bigger number of asset classes. As new industries emerge, so do new trading instruments, which is why today we will talk about a few advantages and disadvantages of cryptocurrency trading as compared to stock trading.
Advantages of cryptocurrency trading
Volatility – in order to generate profits in the markets, traders desperately need volatility. In comparison to stocks, cryptocurrencies are more volatile, considering that liquidity is very low. Just to give you an example, the global cryptocurrency market cap is around $140 billion at the time of writing. In contrast, the Apple market cap exceeds $900 billion. It’s also important to mention that volatility acts like a „double-edged sword” since it can amplify gains and losses as well.
Innovation – the blockchain technology had really managed to disrupt several industries in the past few years, which makes analysts anticipate it will be the building block of a new technological revolution. Since all cryptocurrencies exist thanks to the blockchain technology, we could see them more integrated into the economy as time goes by.
Disadvantages of cryptocurrency trading
Liquidity – since it’s not as old as the stock market, the cryptocurrency market could still be considered in its early phases. As a result, liquidity is much lower, which leads to higher spreads, as compared to other asset classes. Low liquidity can pose some difficulties when it comes to trade execution. Your broker might not fill your orders with high precision and it will be tough for you to get in or out of the market when volatility is very high.
Limited knowledge – the market is new so people had not managed to accumulate enough data in order to understand what moves the market up and down. The same principle of demand and supply is valid for cryptocurrencies as with stocks, but all the reasons that could impact demand or supply are yet to be found. Because of that, it will be hard to appreciate whether a particular cryptocurrency is valuable or not.
To conclude, as with any other asset class, cryptocurrencies have strong and weak points, which is why traders should treat them with caution. Although brokers like AtecsCapital, forex.com, and others had included cryptocurrencies in their instruments lists, greater attention to risk management should be allocated since the market could suffer sudden changes which might have a strong impact on valuation as a whole.