While there are many different ways to invest in cryptocurrencies such as mining, buying a crypto ETF, or slowly accumulating a larger pool of cryptocurrencies, we will be focused on making short term trades based on price movements to realize profits. Cryptocurrency trading generally involves traders trading cryptocurrency pairs or options and futures over a short time span to generate profits on crypto exchanges.
Cryptocurrency trading is often compared to Forex trading due to the similar usage of (crypto)currency pairs. Despite the seemingly similar mechanics, there lies significant differences between crypto trading and other forms of trading.
Apart from the different operational timings, the first key difference lies in the fact that there is greater information asymmetry between Uninformed Investors, Informed Investors, and owners of the cryptocurrency network (if any). This large information gap is often cited as the reason for the price volatility in cryptocurrency markets and the common occurrence of pump-and-dump schemes in the crypto space.
Secondly, many crypto exchanges allow retail investors to easily use significant leverage on their positions compared to traditional exchanges. For example, BitMEX currently allows users to use up to 100x leverage, and Binance allows users to use 5X leverage based on their margin balances. To provide some context to these numbers, traders in Singapore are allowed a maximum of 20X leverage for Forex trades and a 3.5X or 2.5X leverage for cash and share deposit collateral accounts. The looser margin requirements for traders allow traders to take on greater leverage and significantly magnify their gains on their short-term trades.
Last but not least, the majority of cryptocurrencies are not backed by actual assets or earnings, unlike stocks, bonds, or commodities. The difficulty in deriving fair value for such a nascent asset class exposed to large speculative price swings poses a great risk that is a challenge to stomach even for risk-loving investors.
If you still remain unsure about entering the Cryptocurrency trading space, the CryptoHero has a paper trading function to allow users to experience simulated Cryptocurrency trading.