Since the beginning of time, human beings have worked to make their lives better. This quest has led to the discovery of everything we use today. For example, the discovery of crude oil ushered a new era in transport and industrial production. The discovery of the telephone led to improved communications while the discovery of aircrafts reduced the speed and time of travel.
Many people have divergent opinions about trading cryptocurrencies. Many of them believe that the currencies are valueless products that will crash. Others believe that the currencies are likely to soar in the near term. What the two sides accept is that the blockchain technology is here to stay.
In the 1990s, the biggest discovery was the internet. This ushered a new age in communication, productivity, and entrepreneurship. Many companies were built on the back of the internet. Today, we enjoy the services provided by companies like Google, Amazon, Spotify, eBay, and Twitter. These companies are valued at billions of dollars and their contribution to the global economy is in the trillions.
In 2008, the world went into a financial crisis caused mainly by the increased leverage by financial institutions. Before the crisis, banks created risky financial products called Collateralized Debt Obligations (CDOs) and Mortgage Backed Securities (MBS). These services allowed them to offer mortgages to millions of people, even those who were not creditworthy. When the bubble burst, millions of people lost their houses and their jobs. The credibility of the financial regulators such as the SEC and the Fed went down the drain.
This crisis led a person – or group – called Satoshi Nakamoto to come up with an innovative financial product aimed at decentralizing the financial system. The technology they developed – called blockchain – and the cryptocurrency they developed was called bitcoin. It gained popularity because unlike fiat currencies, it was not regulated and people could use it to make anonymous payments.
Since then, the cryptocurrency industry has continued to evolve. More than 1,800 cryptocurrencies have been formed. They have a market capitalization of more than $300 billion. Traders can buy the currencies directly from the cryptocurrency exchanges. They can also buy – or trade – them in brokerages, which provide them as a contract for difference. In the latter, the trader does not own the real cryptocurrency.
The reality is that for the internet to be as successful as it is today, a crash had to happened. It happened in 2000 in what was known as the dot com bubble when many valueless companies collapsed. Similarly, for the financial market to be this strong, companies that had weak track records had to collapse. Some of the companies that collapsed were Lehman Brothers, Bear Sterns, and Peloton Investors.
For cryptocurrencies, this sort of crash is inevitable. This is because, as it was reported by Wall Street Journal last week, most cryptocurrencies were showing hallmarks of fraud.
Still, the industry provides excellent opportunities for traders. First, traders are different from investors in that their duration of holding a financial instrument is increasingly short. As such, they don’t need to do a lot of fundamental research on the long term value of the currencies they are trading.
Second, traders can buy an asset they believe will do well or short assets they believe will fall. This means that traders who believe cryptocurrencies are going down can easily make money by going short. Their bullish counterparts can place buy trades with the hope that their thesis will work out.
Third, the price of cryptocurrencies keeps on fluctuating. At a time when the volatility in the stock market has been falling, the volatility in the cryptocurrencies has been rising. It is not uncommon for the price of cryptocurrencies to fall or soar by more than 5% a day. To traders, this volatility increases their opportunities to make more money than in other asset classes.
As mentioned above, there are more than 1,800 cryptocurrencies, most of which are fraud. To succeed as a crypto trader, you should focus on the few mainstream currencies like bitcoin, ethereum, ripple, litecoin, and bitcoin cash.