Crypto Trading vs. Traditional Assets: pros and cons for traders

On the surface, crypto trading can look a lot like Forex or securities trading. In fact, the SEC has previously signaled that it would treat crypto assets as securities. However, that surface impression is deeply misleading. There are some very large differences, and an unaware trader can be easily caught in the details. So let’s take a look at both the pros and the cons, of trading in cryptocurrency.

To really nail down the differences, we first need to talk about investing, versus trading. Investing, as commonly understood, is usually done because either the investor thinks the asset is being undervalued, or they expect that the rate of return on the asset will outstrip the buying price. Investing is usually done with a long-term plan in mind.

Speculation vs Investment

Crypto trading is generally considered to be speculation. In other words, investors are not investing in an asset, but speculating that its price will rise, or in the case of short futures contracts, fall. This means that the time scale on crypto trading is much lower than investment. While an investor may hold an asset for months or even years, crypto trading is often done over the space of days or weeks. The volatility of a cryptocurrency, or another digital asset typically means that any long term plans will not bear the same results as a short term approach.

Understanding the difference between crypto speculation and traditional investments is key to trade in crypto successfully. One isn’t necessarily superior to the other - it all depends on your comfort with risk. One of the pros of speculating on a cryptocurrency is that it can pay off many more times than a traditional investment. Cryptocurrencies have been known to rise incredibly rapidly, while traditional stocks don’t usually promise the same returns. Of course, this leaves investor open to being on the hook for a lot more if the asset’s price falls, leaving them with worthless, or nearly worthless, tokens.

No middlemen

Another major difference and a pro for trading cryptocurrency is the lack of a middleman. In the traditional investment model, there is almost always something, usually a broker, standing between you and the trade. Hefty regulations further complicate the trading process, and trading fees, capital requirements, and margin fees are often discouraging to retail investors. On the other hand, crypto trading is easy, and many trading platforms allow users to start trading almost immediately after signing up.

Traditional investors, on the other hand, will often wait months or years to start realizing a profit, while a crypto trader can jump into the pool with as little as $100 and start making profits immediately. The downside, however, is that since a crypto trader is speculating on a price, instead of counting on the fundamental value of the asset, the trader is much more exposed to rapid swings in price. This is known as volatility.

The volatility of a crypto asset is often the reason why crypto trading is primarily speculative. Of course, for those traders with a stomach for risk and a keen eye, it also offers the opportunity to earn profits far beyond traditional investments. This is a major draw for retail investors, who often don’t have the capital to compete with traditional investor institutions such as hedge funds and banks.

Constant trading

Crypto trading also provides another benefit over traditional investments, and that is 24/7 operation. Most traditional investments are made on exchanges whose operating times are limited by law and regulation. This means that there is no trading allowed on state and government holidays, weekends, as well as limiting trades to specific timeframes. NASDAQ, for example, trading hours are limited to 9:30 AM to 4:00 PM Eastern time. Crypto trading platforms don’t typically limit trading hours to a specific window. Most crypto trading can be done at any time.

This means that there can be no information delay between some news that will affect a digital asset’s price and the price changing. Here’s an example. Let’s imagine that a pharmaceutical company puts out a press release about some revolutionary new drug on a Friday night. However, an investor will not be able to take advantage of that news until Monday morning. This gives plenty of time for investors such as high-frequency traders, who can act on the news microseconds after trading opens. This leaves a traditional investor vulnerable to others who can simply react faster.

There’s nothing comparable in cryptocurrencies. News of a new digital asset, or a new feature in an existing asset, can immediately propagate through different trading platforms without any delays. This allows a crypto trader to take advantage of information delays much more efficiently than traditional investments. However, this does mean that if a trader misses a crucial bit of information, they’ll be more exposed to the following price changes.

Apples and oranges

These core differences, speculation vs. investing, lack of a middleman, volatility, and 24/7 trading open up a whole new world for profitable opportunities for keen-eyed crypto traders. Of course, the risk is much higher than traditional investments, but the potential for enormous returns is also greater. The golden rule, whether a trader is investing in stocks or trading crypto, is never to put up more money than they’re willing to lose.

Monfex Analytics Department: www.monfex.com

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.