Cryptocurrency Trading in 2022: Everything You Need to Know
Everyone interested in investing has thought about investing in cryptocurrency. Bitcoin has shown record growth from a few cents to more than $60,000. For this reason, many people want to find the very coin, which is now worth a penny, and later will definitely rise in price.
In this article, we will talk about the peculiarities of the cryptocurrency market, where to buy them, what assets to look out for, and why investing in coins and tokens is always risky.
What is Cryptocurrency
In this article, we will not describe in detail the technical details of cryptocurrency, how it works, what is blockchain, etc. That would require a detailed article of its own.
We are more interested in what is better to invest in and what are the pitfalls. Cryptocurrency is not a digital version of the euro or the dollar. It is an instrument that does not depend on national banks and has no regulator or supervisor. It is not backed by anything material and does not have a single electronic form.
Cryptocurrency is a record, a unit for calculations, the information which is stored in a wallet. Investing in cryptocurrency does not give rights to a shareholder and does not involve dividend payments like stocks, for example. It's not even dollar speculation.
The Purpose of Cryptocurrency
Cryptocurrencies can be used as a convenient means of payment or transferring/withdrawing funds abroad. Transactions conducted by the payer are not visible to regulators, and fees are often lower. Recently, cryptocurrencies, given their rise in price, have become popular as a means of investment.
The key feature of cryptocurrencies is the absence of internal and external administrators, so no banks, tax, judicial or other structures can affect transactions with cryptocurrencies. The main feature of cryptocurrencies is the immutability of the record. If information about the transaction once entered into the blockchain (a special structure for recording a group of transactions), it stays there forever. The data cannot be deleted or edited - the blockchain is set up that way, and even minimal changes require a lot of computing resources. That is why there is insignificant demand today among a certain segment of the population. For example, the central bank of Japan recognized cryptocurrency as a means of payment, they are accepted by some companies as payment for their services (airlines, etc.).
What Affects the Price of Cryptocurrencies
As noted above, cryptocurrency is not backed by anything. It is an electronic record in your wallet. Much of its price depends on the mood of the market, the amount of investment, and the number of coins in circulation. Thus, bitcoin occupies about 62% of the total turnover. For this reason, bitcoin is the most expensive and popular cryptocurrency on the market.
The value of any cryptocurrency on the exchange is not guaranteed by anything, so it is volatile. Its price changes often and dramatically, the reasons may be the following:
- The struggle of supervisory authorities against money laundering through cryptocurrencies;
- the ban on the circulation of digital currency;
- large investments, such as the purchase of bitcoins by Elon Musk;
- public statements. The same Elon Musk raised the value of the mock currency DogeCoin with a single Twitter post;
- the closure and bankruptcy of exchanges as well as the launch of new venues;
- deficit or oversupply of cryptocurrency mining equipment.
For example, the Coinrail hack caused bitcoin to drop 10% in 2018. Coinrail's losses amounted to $40 million, and the entire market - $40 billion.
How to Benefit from the Cryptocurrency Market?
To date, there are several types of earnings from cryptocurrency - mining, investing, and trading. We will not consider the first two today, but trading cryptocurrencies involves opening speculative positions to buy or sell tokens of particular digital cash. When investing through an exchange, you can earn solely on the growth of the cryptocurrency. By trading through a broker, you can increase your financial investment by both buying and selling.
Initially, buying a cryptocurrency is done if the trader, based on the analysis, considers its current value to be low. The next task is to sell it when the value rises. To choose the best moment to place an order, it is necessary to refer to the analysis again and decide whether the coin is worth more. If not, then it's a good time to sell it and reinvest your money.
Coming into the world of trading, you should say goodbye to greed. You should not wait long for a profitable value. It is better to make several trades with a hundred percent chance of profit than to miss the moment while waiting for the value to fall or rise as much as possible.
Most traders use a strategy based on the analysis of the market order book. The order book is a table of all orders placed in an exchange for one type of cryptocurrency. It will help even dummies to understand what demand the cryptocurrency has and what value they are willing to give for it.
Based on large-volume orders, it is possible to unmistakably determine in which direction the further token rate will go, because it is the traders who trade large volumes who determine value trends and conduct large-scale rate changes, which small traders cannot influence. They can only detect upcoming changes in time and use them to make a profit.
How to Analyze the Cryptocurrency Market?
There are two ways to analyze the market: fundamental and technical. Let's consider each of them separately.
Fundamental analysis evaluates the value of an asset. All financial and economic factors need to be carefully studied - this will help you understand whether the value of the asset corresponds to reality. Macroeconomic circumstances, such as the level of economic development in the country or industry chosen for investment, are used for evaluation. All such positions can be tracked using lagging and leading indicators.
Fundamental analysis allows us to understand at what stage an asset is now: whether it is over-or underestimated. Based on this information, the trader decides whether to invest or not.
No less effective is a new direction of research - on-chain metrics. It is data science that examines all available information about the blockchain. This can be the largest holders of the crypto, information about the network computing power at the time of analysis, the number of fixed addresses, etc. By combining all known information, fairly sophisticated technical indicators can be created that can predict the overall state of the network.
Unfortunately, there are no accurate tools today that can accurately determine the market value. However, experts hope that after a certain time, the market will become more mature, and this will allow the creation of accurate tools to evaluate crypto assets. Then cryptocurrency trading will become more profitable and predictable.
Technical analysis uses cyclicality in pricing. An attempt is made on its basis to determine the dependence in the formation of value. Analysts believe that the analysis of historical price behavior will help predict the future. Such tools as volume and graphical patterns, price behavior, and technical indicators are used for this purpose. Their careful study allows us to understand how weak or strong the chosen market is.
In addition, technical analysis makes it possible to manage risks, which is very important for the cryptocurrency market. Technical analysis allows for increasing the degree of measurability and certainty of trades management. It is its indicators that are most often used in cryptocurrency trading.
Cryptocurrency Trading: Strategies
Day-trading strategy comes down to opening and closing positions on the same day. This way of trading comes from the financial market, where there are clear market start and end hours.
But the cryptocurrency market doesn't have that, and traders can trade at any time. That's why in day-trading, active trading takes place within 24 hours, and the owner of the crypto never leaves his positions open unattended.
This trading option often relies on technical analysis, which helps choose the best assets to work with. Based on it, some traders select several types of cryptocurrencies to trade, while others select only one or two. In any case, day-trading is considered complicated - due to the high risks of losing investments. That's why it is suitable only for experienced traders - people who understand and accept the full responsibility.
Cryptocurrency trading using a swing trading strategy implies the calculation of earnings on longer position retention - from a couple of days to a couple of months. Both beginners and experienced traders can use this method. The latter often analyzes the market and chooses the asset, which has a real chance to grow shortly.
Beginners should prefer proven cryptocurrencies because there is a great risk of losing money on unexplored assets. Swing trading, with the right choice, is ideal for those who are just starting out on the market. Absence of stress from the rush of placing orders and the need to make quick decisions ensures its maximum efficiency.
Technical analysis is also most often used for market analysis. However, in some cases, it is logical to add fundamental analysis as well, because it is useful for choosing strategies that are realized in high time frames.
Trend trading is defined as long-term asset purchases, i.e. at least for several months. The goal of a trader's strategy is to buy a cryptocurrency at a low cost and sell it on a rise in the not-too-distant future. To do this, players gather all the information about the general direction of the market, analyze and choose the most promising coins, and then make a purchase.
Because of their long-term investment position, traders choose fundamental analysis for researching market dynamics and flows. And at short distances, they can use technical analysis to know in advance if the trend is falling. In this case, it will be necessary to decide whether to sell the asset because of the irreversible fall or to buy a couple of dozens more coins on the fall, hoping for a reversal in the future.
Cryptocurrency trading in super-low time frames is called scalping. Traders who use this strategy can open and close orders in just a couple of seconds. The traders use technical analysis to open such positions because it makes it possible to forecast price changes in a short period. Profits from such trades are not so high, but if one receives them daily, the income increases quite substantially. Nowadays, traders in this direction often use Expert Advisors (robots).
It should be understood that scalping should not be used by beginners. You can trade cryptocurrency using this strategy only if you have a deep understanding of how the market works, as well as the exchange where the operations take place. It is very important to know exactly how to use technical analysis tools to improve trading results. If a trader has become deeply familiar with scalping and knows with the third eye the correct patterns and possibilities to play with short-term price fluctuations, it means the trader is mature enough to use a scalping strategy.
Risks Associated with Cryptocurrency Trading
Speaking of risks, there are several. Let's not just support cryptocurrency by thinking it is free from all sorts of problems. Rather, there are some factors you should be well aware of before deciding to invest in cryptocurrency or not.
Vulnerability to cyberattacks
Unlike stock exchanges, cryptocurrency exchanges are very vulnerable to cyberattacks. As this currency is digital and completely intangible, it can be hacked. There is a good chance that it will become the target of all kinds of criminal activity. In the past, even some of the biggest investors have fallen victim to these attacks. Consequently, they have lost a significant amount of investment at the hands of these attackers. Most of their digital currency was stolen due to a security breach halfway through the cryptocurrency exchange.
Even though using bitcoin market analysis techniques makes things fairly secure, you still can't guarantee a 100% return on your investment. Holding crypto is a fairly complicated process. Compared to it, owning bonds is considered much easier. This vulnerability of digital currencies really discourages many people from investing in them.
When it comes to crypto, competition is fierce. Even though the risk is great, people trust it and buy in bulk. Blockchain, supported by the industry, is growing by the day. The entire infrastructure is digitally built, and the crypto ecosystem is gaining a lot of momentum.
Consequently, you may have to face a lot of competition. Its value can increase from the moment you decide to buy it to the moment you get your hands on it. Consequently, making quick decisions and staying on the right track is really necessary.
Attention from government regulators
The crypto industry is a young and growing market. As such, there is increased attention to it as well. After all, if government regulators simply turn a blind eye to what's going on in it, the real chaos will ensue. A striking example of this is the ICO boom in 2016-2017. Many projects were launched just to raise money and disappear.
At that time, state regulators in various countries did not monitor the industry, which led to the emergence of many fraudulent projects. It turned out that practically all of 2016, gullible investors sent funds to whoever they knew and, in fact, did charity work because they received no money back. It was only in 2017 that government regulators paid attention to this, and soon after that, the ICO era came to an end.
However, the people who want to profit from investors have not disappeared, and there are more of them. Of course, they are actively combating them, and various methods of counteraction are being developed.
High volatility of digital assets
It is a well-known fact that volatility in the crypto market is off the charts. In traditional markets, a 5% change in price per day for some assets is considered impressive enough. In the crypto market, this can easily happen in a minute, and no one will be surprised because it is a cryptocurrency.
Moreover, such volatility is inherent in digital currencies, which are already known to the public and have impressive capitalizations. When it comes to new digital currencies that are just entering the market, impulse price growth can bring an investor a profit of thousands of percent.
This is both the upside and downside of investing in cryptocurrencies. If the timing is right, you will make a good profit. But if you decide to invest in a downtrend, losses are inevitable. It is worth noting that even in the moments of cryptocurrency drawdown, it is better to keep them rather than sell them if they are from the top 20 in terms of capitalization. Remember the March 2020 market crash: Bitcoin was worth $4,000 at the time, and just over a year later it renewed its all-time high at $65,000.
In this regard, we can say that there will be no better time to invest in cryptocurrencies than now. They get more expensive every year, and you lose potential profits, especially when it comes to business: how many ideas you could implement with profits from investing in cryptocurrencies.
There is no single legal framework for cryptocurrencies in the world. The International Monetary Fund is developing a single set of rules for cryptocurrencies, but this has been going on for years, so when it will appear is unknown.
There is already a country where Bitcoin is legally used as a means of payment - El Salvador. To date, not all participants of the world arena accepted this step as logical, but do not underestimate this event. Just a couple of years ago it was hard to imagine, but today it is already a reality that we are all watching.
But not everyone has a positive attitude to cryptocurrencies. For example, China is actively developing a national stable coin (state-owned cryptocurrency), due to which the authorities began to ban "traditional" cryptocurrencies.
The main idea is this: if you bought Bitcoin in El Salvador, you cannot do anything with it in China - because of the different legal background of the digital asset.
Why Cryptocurrencies Will Keep Growing and Is it Worth Investing in Bitcoin?
The global capitalization of BTC is $746.57B. This means that at the current rate, there are already coins worth over a billion in users' wallets. The amount continues to grow despite periodic drops in the exchange rate. But no one can guarantee that the uptrend will continue and not turn in the opposite direction. That is why it is so important to determine whether it is worth investing in bitcoin when its price is at its peak.
Investors around the world consider crypto an asset that is worthy of attention and investment. Virtual coins have great potential, being compared to gold and securities. Investments of fiat currency in digital currency become especially relevant in the light of the policies of regulators.
The decisions of the last two US presidents envisage support for the economy, for which about 5 trillion dollars have already been spent. European financial institutions take similar actions. Consequently, there is a lot of "free money" on the market that needs to be invested. The main areas are corporate stocks, precious metals, real estate, and... cryptocurrency.
Soap Bubble or Reliable Asset
There are different predictions about cryptocurrencies on the Internet. Skeptics often refer to the main difference between virtual coins and real coins - the lack of fundamental value. Crypto is not an acceptable means of payment. It is not put into circulation by a particular state, that is, it is not secured by it.
Circulation of bitcoin or other coins became possible only because participants agreed among themselves to use it for settlement. This agreement can somehow "disappear" or be annulled. Then the zeros and ones on the Internet will no longer have value and will become a burst bubble.
The probability of such a scenario is zero. There are several reasons for that:
- Mining is done in different states and no single country can take control of the entire blockchain because of its decentralization.
- Bitcoin issuance is limited and once the last coin is mined, it will be impossible to mine it. This makes BTC similar to gold.
- The purchasing power of precious metals is also based on the arrangement. And so far, the collapse of the global economy, where gold is the collateral, has not happened.
Could There Be a Collapse of the Cryptocurrency Market?
The bottleneck of investing in cryptocurrency, particularly bitcoin, can be considered its high volatility. The rate fluctuations in the short term do not depend on the fundamental economic laws. We have already mentioned Elon Musk`s tweets - once it caused the value of BTC to plummet 17% against the USD.
Volatility makes it possible to make money on exchange rate changes. But the high risks do not allow counting on a reliable investment. In the future, the capitalization of cryptocurrencies will increase. Thanks to this, they will become less and less sensitive to the statements of individual entrepreneurs or politicians. The market will not react to them with rate hikes, the fluctuations will not go beyond the main trend.
Investors should pay attention to the legislative regulation of cryptocurrency circulation. This factor is more important for the growth of the value of coins. It makes it possible to use them to invest for profit.
Governments of different countries understand the value and importance of cryptocurrency. But bitcoins are based on blockchain and cannot be regulated centrally. Therefore, states are introducing their own digital money. They cannot be called cryptocurrencies, but the principle of operation is similar.
For example, in China, a digital local currency is being used as a pilot project in several provinces of the country. And it is planned that by next year, it will be legal tender. And will enter into circulation along with traditional "paper" money.
As soon as the test period is completed, there is a possibility of withdrawal of cryptocurrency from the legal field. After all, it will create competition for local virtual coins. It is also possible to ban it as an asset that can be traded on an international exchange. But in this case, the saying "Nature abhors a vacuum" comes into play. If one country bans crypto, others will integrate it tightly.
Don't Put All Eggs in One Basket
It makes sense to invest in bitcoin. But to avoid financial risks, you should do what large international funds do. That is, you should invest in different assets - diversify. Virtual coins can be used as an additional direction of investment along with the classic options.
The size of investments can be up to 20% of the total investment. If crypto grows at the same rate, the "share of the pie" will increase by an order of magnitude. Investments will bring a profit of 100% and more. This cannot be achieved with securities, real estate, or other classic assets. In the event of a decline, there will be minimal damage to the capital.
In addition to diversification by assets, it is necessary to distribute risks between coins. That is, it is not advisable to invest only in BTC. You can buy Ether, which was sold at the end of last year for $752 per coin, and now stand at $2850. LTC and XRP are also considered proven and reliable assets. In this case, even if one of the coins collapses, the losses are compensated by the growth of the others.
Cryptocurrency is the challenge of the day, and everyone trusts it for one reason or another. If you stay on the right track and make informed decisions, you may not have to deal with terrible consequences. Rather, you can reap many benefits in terms of monetary gain.
If you invest in cryptocurrency correctly, manage your risk factors by reducing them with research and deliberate steps, and you won't regret your decision to trade cryptocurrency!