The cryptocurrency market is in its infancy compared to all other financial markets, but that is not to say that it should be ignored. Despite the marmite nature of the market, you cannot ignore the fact that we saw one of the largest rallies in history in 2017, when bitcoin and other cryptocurrencies increased by 26,000% in some cases!
The move forced people to take note of this new asset. People are still undecided on it at the moment and still cannot actually decide which category it fits under. It is a currency? A commodity? It is still unclear, especially with the amount that is on the market, lots of them serve different purposes, with some acting like a currency whilst others are a commodity.
Whilst the above image is an example of one of the largest movers of that year, you can see the volatility that was caused and what made the financial sector actually take the market seriously.
What is a Cryptocurrency
A cryptocurrency is a digital asset designed to be used as a medium of exchange. It has an underlying technology called blockchain that makes the exchange secure and cuts out the middle man (no banks necessary).
Cryptography verifies the transactions (again no need for banks) and also controls the creation of new units or coins or tokens, again the same way a central bank would but not using a bank.
The idea is to trade freely without being reliant on third parties.
As we have already mentioned, 2017 saw the huge appreciation of all things crypto. It took the financial world by surprise but what actually happened?
The Recent Cryptocurrency Story
The short answer is that there was no downwards pressure during the huge volatility. In normal markets, institutions and speculators have the option to sell a market without owning it. This can be done through a number of derivatives but essentially mean that should someone feel an asset is overpriced they can sell it and try to buy it back at a lower price.
The cryptocurrency market did not have that option. There was no way for anyone to sell bitcoin or any other cryptocurrency without actually owning it in the first place.
The Crypto Rally
So in the first place, people were buying cryptocurrency because they believed in the technology that supported it and ultimately were playing the long game. Buy and hold.
Slowly more people began to hear about it and started buying cryptos. Human behaviour began to take over, as people saw the price increase, two things happened; they bought more and new people bought their first amount. This herd mentality snow balled.
As the price was rising, there was nothing to keep it down. A normal market moves according to supply and demand, and the demand was growing rapidly. What would happen in a normal market is that the institutions or the larger players in the market would begin to sell off their positions, this would then slow the market down and it would eventually come to a stop.
In the crypto market, there were barely any institutions involved in the market and the big boys, those that had a lot of cryptocurrency were the original investors or owners and didn’t want to sell because, one, they didn’t want to sell their coins, simple. And two, because they wanted to see the market continue.
Therefore there was no downward pressure and new speculators were jumping on the band wagon, driving the price up and up.
The Crypto Sell-off
Towards the end of 2017, most people had heard of bitcoin and other cryptocurrencies. Governments and central banks were forced to talk about them because this is an unregulated market that from the outside looked out of control.
People were talking about regulation, would it come in? At the time of writing this (October 2018), it is yet to come in but it does look like it is a matter of time. There was also the introduction of bitcoin futures contracts. This was big.
This meant that the power houses of the financial markets could now sell bitcoin without owning first. Suddenly not only was there more downward pressure but there was also more liquidity in the market.
At the start of the 2018, the markets crashed and fairly spectacularly at that. Some of the moves down were bigger than the moves up. The Jamie Dimon’s (JPMorgan Chase CEO) of this world, who said that bitcoin was a fraud, were all looking very smug because the market was looking like it could fall to almost zero.
Like all herds, once the sell-off started, everyone began to sell.
A Stable Crypto Market
After a couple of months, like most news, bitcoin wasn’t in the headlines as much, its volatility had reduced and although it was moving, we weren’t seeing any extraordinary days, at least not to the same extent the market had been producing.
10 months on and we now see a very stable, flat, sideways market. Frankly what we’re seeing is the crypto market mature, it is now moving more like traditional markets. Rather than swinging 20%, it is now doing 2%, although there are still the odd large day, it does not compare to the end of 2017.
Financial institutions, although were reluctant to get involved in the crypto market were forced because their clients, the ones who essentially pay their ways, wanted to invest in crypto. This meant that they had to create a way for them to enter the market.
As the crypto market is unregulated, they couldn’t simply just buy bitcoin because it opened them up to a huge amount of risk. As we’ve highlighted, they created a futures contract of the asset. This they could trade, and it gave them exposure to the market.
Adding a futures contract meant a huge more money could be invested into the market and ultimately create increased liquidity. This means that it is easier to buy and sell at certain prices because there are more buyers and sellers in the market. This is one of the reasons we are seeing this market appear subdued or mature.
The Future of Crypto
Given what we have just said, here at assettrading we don’t see this market repeating its 2017 feats but we don’t seeing it going anywhere. It is a market that is maturing and given the underlying technology that supports it we don’t think it will just disappear. Blockchain is a revolutionary idea and will change the world therefore these markets will stick around.
As there are hundreds if not thousands of cryptocurrencies, it is hard to say which ones will succeed but given the marketcap of some of the major coins, I’d be reluctant to say they are on their way out anytime soon.
Should you Trade, Buy or Invest in Cryptocurrencies?
Times are changing. If you are looking for the 20% days from an asset, cryptocurrencies is not going to produce that going forward. If you are interested in trading a new market, that will still offer unexpected moves and that can offer the world a real innovative solution to business problems plus more then it is certainly worth looking into the cryptocurrency market.
It is beginning to behave like traditional markets, which means day trading it is now possible. Previously with the huge swings, getting the price you wanted was very difficult and actually creating a strategy was unrealistic given the slippage that would have occurred. Now however it is possible, stick to the major coins; bitcoin, ethereum, ripple etc and you will be able to day trade it.
Not only can you trade similar strategies to other markets but because there is still no regulation you can use arbitrage and essentially buy from one exchange and sell at another, taking any price differences as a profit.
There are two ways you can trade cryptocurrencies:
Exchanges – These are places you can buy and sell the actual underlying asset. You will need a wallet to send your cryptocurrency.
Brokers – Brokers have now got on board with the cryptocurrency market and offer them as CFDs. This means you can place stop loss and take profit orders but as we mention regularly on assettrading, there are large risks trading CFDs, so make sure you’re educated around the topic. On the flip side, you can make good profits quickly.
Investing in Cryptocurrencies
The rational of investing in cryptocurrencies has not really changed despite the big moves. Investing in anything is about the long term. The cryptocurrency industry is in its infancy, we are not going to truly see what the blockchain can do for another decade or two.
Will every business have some sort of blockchain technology and which coin / token will be leading the way with their blockchain? These are the types of questions you should be asking yourself if you are thinking about investing in a cryptocurrency.
Find out what the roadmap is for the coin and how it can help with industry and the world.
There is still plenty of time to invest in cryptocurrencies, the risk is still there that it might all be a fad but I would recommend you do the research and see for yourself what blockchain can offer.
How to Invest
How to invest is just like trading and buying a cryptocurrency, however you simply plan not to sell it for a few years at least. The process is the same therefore, the main two ways are to use a broker or an exchange.
Although with the emergence of futures contracts, we are starting to see some ETFs offer exposure to bitcoin, therefore investing in an ETF is also an option when looking to invest in bitcoin or cryptocurrencies.