The cryptocurrency market has created new opportunities for traders and investors, and many have jumped on the bandwagon. However, for anyone interested in cryptocurrencies, prudence is in order. There is no shortage of investment advice and tips offered online, but it is important to separate the wheat from the chaff. Much of the advice is ineffective at best and dangerous at worst. Above all, avoid any schemes that look too good to be true.
You should also know that cryptocurrencies can be volatile and risky. This market is still young and unregulated, and it is impossible to tell whether cryptocurrencies are here to stay in their present form. The regulatory outlook for the cryptocurrency market remains unclear, and future regulatory developments can materially affect an investor’s cryptocurrency holdings. Finally, security remains a major concern. Hacking attacks are not uncommon, and cryptocurrency investors have experienced large losses as a result of security breaches.
It is important to be aware of all the risks and to be realistic about the results you can expect. With that in mind, there are a number of strategies that you can pursue.
The most plain-vanilla strategy involves buying crypto coins and waiting for the underlying cryptocurrency to appreciate in value. This is essentially a long position and is similar to buying shares in a company in the expectation that the price of the stock will go up. Unlike with shares, you have to remember that, as has already been mentioned, the regulatory outlook is uncertain and that cryptocurrency holdings are vulnerable to security breaches. If you believe that a cryptocurrency will increase in value, it might be a better idea to buy on a downswing. This is a passive investment strategy and will not generate any money until you sell your holdings. So far Bitcoin (BTC) has been the most popular cryptocurrency among investors working with this strategy.
Those seeking an active income often use arbitrage. Due to its decentralized nature, the cryptocurrency market is a good place to look for arbitrage opportunities. However, cryptocurrency arbitrage requires speed and proper risk management. Arbitrage traders need the right technology that allows them to not only identify arbitrage situations, but also to act on them quickly. The overwhelming majority of arbitrage traders end up losing their entire deposits. BJF Trading Group Inc. is developed crypto arbitrage bot 2 years ago and crypto bot can be used for arbitrage between most popular cryptocurrency exchanges.
If you do think that cryptocurrency arbitrage is for you, there are several popular approaches. One is to perform cryptocurrency arbitrage between different crypto exchanges. The idea behind this approach is simple: you wait until you see a price difference on a cryptocurrency between two crypto exchanges, at which point you buy on the exchange with the lower price, transfer the coins to the exchange that has the higher price, and sell it there. While this sounds easy enough, things are more difficult in practice. Exchanges can charge fees on transfers, and prices can change while you move your crypto coins.
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Another approach involves keeping currency and cryptocurrency balances on several exchanges while monitoring the market. The benefit of this approach is that the trader doesn’t need to do transfers between exchanges, which can cause the trader to lose money and time. The drawback is that the trader’s funds are tied up on several exchanges, and the trader is confined to only a handful of exchanges – unless the trader has considerable financial resources, that is.
Some of the other trading strategies including margin lending/funding as well as providing liquidity to the market.
With margin lending/funding, you lend your cryptocurrency assets to other crypto traders and charge interest on your loans. There are several exchanges that support margin lending (Bitfinex is one). This can be a viable strategy if you are a long-term cryptocurrency investor and want to make some money while you hold your assets. But there are risks. You need to understand whom you’re lending to, and on what terms.
Providing liquidity entails, as the name suggests, creating liquidity on cryptocurrency exchanges. This is done by placing limit orders near the prevailing market price in order to decrease spreads, usually on both the bid and ask sides. This strategy should be used in conjunction with other strategies, especially given that some cryptocurrency exchanges lower commission fees for traders who provide liquidity. Additionally, this strategy can’t be used in manual mode, and you need to make sure you have the right tools and technology at your disposal to make good use of this strategy. If you’re interested in being a liquidity provider, it is best to test your trading strategy – for technical reasons, something of a challenge with cryptocurrencies. You also need to choose your exchanges well.
Both margin lending and liquidity creation are more sophisticated strategies and should be used with care.
Whichever strategy you choose, make sure you understand the risks that are involved. Remember that the cryptocurrency market is lightly regulated, security is an ongoing concern, and there is a lot of volatility. Above all, never invest more money than you can afford to lose.
Boris Fesenko
BJF Trading Group Inc., Oakville, ON, Canada
Disclosure: This is a sponsored article