The introduction of cryptocurrencies has offered something that most traders haven't seen in their lifetime: a new asset class to trade. Cryptos are not a substitute for stocks, ETFs, or futures, but they can be a great addition for new and experienced traders to their portfolio. Unlike other asset classes, cryptos are unregulated, which presents different opportunities for traders looking to capitalize on them. Let’s explore these differences.
Fewer Limitations
First of all, traders looking to get into the world of cryptocurrency trading will notice a big difference versus stocks on the regulatory side. Stock traders must conform to the Pattern Day Trading (PDT) rule. The PDT rule requires that anybody who wants to day trade maintain a minimum balance of $25,000 in their account. If your balance falls below this level, you are not allowed to day trade. Crypto trading does not have this rule, so traders can open an account with less than $25,000. This allows traders to try out the cryptos without risking a lot of money.
Also, position sizes can be a lot smaller than stocks. Some stockbrokers prohibit odd lot trading (less than 100 shares), and ones that do charge such a high commission that it is next to impossible to make a profit. With crypto trading, fractional trading is very easy as there is really no such thing as a round lot of 100 shares. You can easily trade .042 of Litecoin for example. Again, for getting your feet wet in this new space this offers a big advantage.
Another huge advantage over stocks is that cryptocurrencies trade 24/7. No other market can claim that. Even the forex market closes over the weekend. This allows people with full-time jobs the ability to trade during their non-working hours, and anybody can continue trading after the stock market has closed. Because there is no open or close, cryptos benefit from eliminating one of the major downfalls and dangers of swing trading: gaps. A gap is an opening price that is significantly different from the previous closing price. For example, a stock can close on Tuesday at $30.00, and open Wednesday morning at $22. For a trader that had a position in the stock and had either a mental or real sell stop at $29.50, the result of this gap down would be disastrous. The trader was willing to lose $0.50 on the trade but is now down $8. A few of these could end the career of any trader. With cryptos, there are no gaps. Outside of “fast markets,” stop orders generally get executed where the trader intends them to be executed.
A Clear Market Leader
A market leader sets the tone for the overall direction of the market. For example the FANG stocks ((Facebook, NASDAQ:FB), Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet Inc GOOG GOOGL) are four stock that (in general) will set the tone for the sentiment of the NASDAQ. For cryptos, the market leader, by far, is Bitcoin. When Bitcoin goes higher, the whole crypto market usually goes higher as well. The opposite is true when Bitcoin sells off. By keeping an eye on the direction on Bitcoin, traders have a roadmap of where the other cryptos might go, and trade accordingly. Although the stock market does have market leaders, the degree that Bitcoin is a leader in the crypto space offers one more advantage of trading the asset class.
Are you faster than a computer? Probably not. Do you have the trading experience and knowledge of Wall Street traders and hedge fund managers? Maybe (or maybe not). Another important advantage crypto trading has over stock, futures, options, and forex trading is the lack of professional traders and high-frequency trading. The crypto trading universe is still in its infancy and is not yet big enough to attract Wall Street traders and computerized trading that can execute 100 trades in the time it takes you to blink. This presents a level playing field for newer traders and a huge advantage for experienced traders looking to transfer their trading skills to cryptos.
Speaking of skills, one of the things that have attracted me to cryptocurrency trading is not having to learn anything new. The same technical analysis tools that I use for stock and futures trading can be applied to crypto trading.
And finally, there is always volatility in crypto trading. As traders, we count on price movement to give us the opportunity to find and enter into profitable trades.
Whether the crypto space is here to stay or disappears in a few years remains to be seen. But as a trading vehicle, cryptos offer advantages over the established capital markets and should be seriously considered for traders looking for additional profits.
Jeff Goldman is the co-author of The Crypto Prophet on the Marketfy platform.
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