Trading cryptocurrencies is much like trading any other asset class, however, there are some unique features of crypto markets that beginners should be aware of:
Firstly, crypto trades 24 hours per day, 7 days a week. It’s a market that never closes, so you can trade it when all other markets are closed. This leads to some interesting dynamics that traders have observed.
The tight correlation between crypto and the US stock market in recent years, means that at times when US stock markets are closed, some investors use crypto as a proxy to express positional views related to how they believe US stocks will open once trading resumes.
Secondly, and perhaps more importantly for your account balance, crypto is by far the most volatile asset class we have at the moment. Some other assets may have given it a run for its money during the pandemic, but there’s really nothing that compares.
Why is this important? Because crypto’s sometimes incredible volatility acts as a natural kind of leverage (it can be very profitable when you make a correct trade, but like using leverage, it can be brutal on the way down). For this reason, using leverage to trade crypto is an unbelievably risky proposition.
Remember, it’s the relative stability of currencies that led to the practice of CFD brokers offering leverage to their traders. Crypto markets can fluctuate more in a single day, in percentage terms, than some currencies move in a year! So, be advised, it’s a risky asset class as is, and the use of leverage is only recommended for experienced traders.
Finally, since the most liquid crypto markets are priced in USD, crypto traders must pay extra attention to the fate of the US dollar. This is, of course, true of all commodities that are priced in US dollars. However, it’s especially so in crypto, because selling to USD is considered a risk-off trade, whereas buying crypto with US dollars is considered a risk-on trade. In many ways the bitcoin to usd pair (BTCUSD) is one of the best ways to express this risk-on/risk-off distinction.