Cryptocurrency Trading 101: How to Trade Bitcoin Strategies Investment Guide
Cryptocurrency Trading Guide: The Execution Behind Bitcoin Trading
Bitcoin Trading: The Upside
Trading with Bitcoin can be a daunting prospect. There are a lot of articles and opinions floating out there that only further confuse this. But an agency whose job it is to offer clients advice on how to move forward during competitive markets may actually suggest using Bitcoin for transactions. Why is that?
Permission Not Necessary
Bitcoin is not like a fiat currency. This makes it not dependent on government, gold, financial institutions, or international organizations. It has no borders, it cannot be banned out of existence, and is mostly untouched by the devaluation of other currencies.
The digital currency Bitcoin is also completely free to use.
Seizures Not a Risk
Fiat currency is technically borrowed from a bank. Since we keep money in banks, it can be seized for various reason by government entities. This includes creditors that have judgements against you.
Bitcoin does not have this problem. It can never be seized because you OWN it. Blockchain tech means it can’t be stolen and you are the only person with the digital keys to it.
It’s Limited Supply
Current fiat currencies fall prey to devaluation because of money printing but bitcoin is more scare than that. New coin can never be made. There will always be a finite amount of 21 million once it is all mined.
This limited supply keeps certain value, becomes predictable, and cannot be influenced by speculators.
Easy and Fast
One of the best things about Bitcoin is its speed. Transactions can be completed near instantly because of the peer-to-peer transfers the Blockchain insists upon.
Bitcoin almost never has fees attached. Visa, PayPal, and Mastercard charge clients fees through their banks when making transactions (its why some stores require a minimum $5 payment to purchase with a card, in order to make it worth it for them to allow you to charge with a card). This is the reality with all central payments systems.
Another big benefit to Bitcoin is its anonymity. Transactions with Bitcoin keep the user hidden if wanted, and that includes from government. It does not require name, email, or any sensitive information of its users in order to take part in it. While this started out as a benefit of high crimes, cash still reigns kind and it has since slowed down.
4 Popular Options for Shorting Bitcoin
The air is full of optimism around cryptocurrency and it's not hard to see why. The bearish market in Q1 has been nullified by an absolutely stunning rise int he fortunes of most coins during April and it was all because of Bitcoin. Once the big coin started steamrolling the trading charts, everyone else followed.
These days, people are waxing lyrical about a new bull market that will eclipse the previous one and many are looking to get rich by hodling for as long as possible. Sweet. If you think that's all pie in the sky thinking by traders who should know better, then you are definitely looking to short Bitcoin and make a fortune off of others' misery. If that sounds like you, then here are the 4 most popular options for shorting Bitcoin in today's market.
Prediction Markets: Difficult for beginners, great for blockchain savvy traders
Blockchain powered prediction markets are perfect for shorting anything. It is the best way to bet that Bitcoin will fall, and that right soon. Platforms such as Augur and Veil will allow you to wager against the further price increase in Bitcoin.
What is usually done is staking another cryptocurrency that Bitcoin will fall. Let's take Ether as an example and the Veil platform to expand it. You can set a wager with 0.9999 ETH that Bitcoin will fall on a predetermined date. The other option would be that it would rise. Should you turn out to be right, you would be paid out in Ether.
Prediction markets might not be classic shorting of a currency, but they are exceedingly similar and they are something that only very technically savvy investors that understand smart contracts should be using. If you are not clued up with regards to how these prediction markets truly work, you might look at another method such as using a digital asset exchange.
Digital Asset Exchange: the easiest method to short Bitcoin
You won't find an option to short Bitcoin on all exchanges, but ones that do offer this ability are Bitfinex, BitMEX, and Kraken. The method which you would use is to sell the digital currency at the current point and buy it back when it is priced lower. How would you do this? Well, the first thing you need to do is borrow the asset and this is all done behind the scenes on the exchange side. You will be paying a small fee for borrowing the asset which will be deducted from your profit (should you make any profit).
Many exchanges that offer an option to short sell cryptocurrencies also give the traders the option to enable margins. This then allows traders to use leverage in their trades which can boost profits massively.
CFD: The Classic Short Bet System
Private investors might find it easier to use CFDs (contracts for difference) that are found on any good retail brokerage exchange. CFDs are common in the currency, and commodities speculation markets and they have the benefit of the trader not needing to own the asset.
While it was different some time ago, today all major brokerages support Bitcoin trading and you can short sell to your heart's desire. It is also easier if you are already using a brokerage to speculate on other assets such as currencies, stocks or commodities. If you are here looking for the easiest way to short Bitcoin but have little to no experience with crypto exchanges, then your best bet would be to use your brokerage account and use the CFD option to trade in Bitcoin.
Bitcoin Futures: Sell them for a profit
A futures contract is considered a derivative financial instrument. You can find them in all sorts of places such as BitMEX, which is an unregulated cryptocurrency trading market. Alternatively, you can use the Chicago Mercantile Exchange which is a properly regulated (and leading) US-based derivatives exchange.
What is a futures contract? It is simply a contract that allows the holder to buy a certain asset at a certain price at a certain point in time. This allows you to bet on an asset's price without needing to own the asset itself. Putting it into context, you could sell a contract guaranteeing the buying party Bitcoin for $5200 dollars in June of 2019. If the price falls to $4200 in June, the sale goes through and your profit is $1000 on the trade. While futures Contracts are much more specific, that is the general way it works.
Choosing the Right Benchmark to Measure Your Investments
For the most part, the reason why many people have run away from the crypto market is because of its instability. The market is popular for many things including its ripeness for investors but also its volatility. However, with the recent upward streak Bitcoin has been experiencing for a while now, there has been a noted incursion of investors into not just the Bitcoin space but the entire crypto market in general. However, for investors who don’t know a lot about crypto, the market is largely based on unusual technology and this might be a bit daunting for most people. It is for this exact reason that it’s almost compulsory for you to understand exactly how the market works and what particular moves to take and when to take them.
Measuring the Success of Your Investments
The only way to know if your investments are really paying off and you’re not just wasting money is to properly measure them with a particular yardstick or benchmark. Doing this precisely tells you if you’re making or losing your assets and helps you re-strategize if the latter is the case.
Normally, this is a very easy concept but if you’re investing in crypto, setting the right benchmark might be a bit tricky. Crypto investors, for example, have to figure out whether or not the success or failure of their investments should be measured with the crypto itself or with the fiat currency used for the purchase. If you’ve ever wondered which one is best to measure your investment, the best answer is that it depends on how you purchased these cryptocurrencies in the first place. The options on buying into a particular asset are to either use fiat currency or to use another crypto to get in. The following are likely scenarios for both methods.
Using Fiat to Buy-In
If you buy into the market using fiat then that currency is the benchmark to use in measuring your gains or losses. Doing this makes things a bit more straightforward.
If you decide, for example, to buy $1,000 worth of Bitcoin and we assume that the current price is $8,000 then what you get is 0.125 BTC. This would mean that if there is a 100% increase on Bitcoin and it’s now valued at $16,000 then you now have 0.25BTC at $2,000 making you an extra of at least $1,000 if you decide to dump your entire wallet balance.
This is the easiest and most straightforward way to measure the success or failure of your investment but it would mean that you only stick to cryptos that let you buy with fiat.
Using Bitcoin to Buy-In
This method is also not difficult but a bit less straightforward than the previous. The entire market currently has at least $2,000 different assets and for the most part, you can’t buy in with fiat. Most of them would require you to buy in with another crypto first, like Bitcoin. If you use this option and you’re to properly measure your investment with an asset you used Bitcoin to buy, then the only way to measure either your success or loss is using the current Bitcoin value. Because of the market volatility, once you’ve made the purchase, you cannot use the value of Bitcoin at the time of purchase to calculate this.
Let’s say you buy Bitcoin at $X and then use it to buy an altcoin at $Y per coin. If after a while the value of the coin becomes $2Y, then normally it would be considered a good investment because you have at least doubled your funds. However, if BTC becomes $4X during the same time, then you have lost considerably regardless of the $2Y your altcoin is currently worth. This is because leaving your funds in Bitcoin would have given you more profit and the mere fact that you used up your Bitcoin to buy something that didn’t also quadruple in value, made you a loss. This is the proper way to use Bitcoin as a benchmark for measure loss or gain if you used Bitcoin to make the purchase.
Final Thoughts on Using BTC (Satoshi) Ratio Metrics
Knowing the right benchmark for measuring your investment is very important. When dealing with crypto bought with Bitcoin, it helps to use Bitcoin as a benchmark. Not only can you easily tell if you’ve made a profit or loss, but it can also help you decide whether it’s better to leave your funds in Bitcoin or even buy into a different altcoin if there’s one that has done considerably better than BTC.
Biggest Cryptocurrency Mistakes Traders Make When Getting Started
As you can see, entering the world of cryptocurrency can be like visiting the Land of Oz – once you step through that door, everything is different even if you are accustomed to traditional markets and conventional wisdom. Let's cover costly mistakes virtual currency investors make when starting out trading their favorite digital assets.
If you're a crypto trading rookie, you'll learn all too soon that you're not in Kansas anymore, so here are ways to avoid the top 5 mistakes new traders often make.
1. Don't Diversify Too Quickly
You might have been told never to put your eggs in one basket when it comes to your investment portfolio, but in the world of cryptocurrency trading, it's absolutely possible to have too much diversification, and much too soon.
The reason you need to slow your roll in this circumstance is that the digital currency landscape right now is that it's kind of akin to the Wild West – there are so many altcoins out there now that it's almost impossible to know which ones are legitimate and which ones aren't.
The trick is to do your research and choose widely-distributed coins with high market capitalizations and trading volumes that have shown their longevity. Start with Bitcoin, of course, but then just choose one or two altcoins at first until you've got some experience under your belt.
2. Don't Spend Too Much Time Trading
This sounds counterintuitive, but it's entirely possible to end up making less profit by constantly trading. New crypto traders can often become so passionate about the digital currency markets that they spend every waking moment watching price fluctuations and trying to find the perfect trade, but doing so can be utterly exhausting in a hurry.
You need to temper that passion with wisdom. The crypto markets are so active that even if you miss what looks like one amazing opportunity to profit, they'll be five or ten more down the line just waiting for you. Trading while you're fatigued can lead to stupid mistakes because you're thinking emotionally instead of logically.
3. Don't Panic
The altcoin scene is incredibly volatile. This can create a lot of uncertainty in the heart of a novice trader, and that can all-too-easily generate feelings of panic and fear in your gut – which is the worst emotional state to be in while trading.
Just as trading while you're fatigued from spending too much time watching the markets can be disastrous, making trading decisions because you're feeling panicky about your investment can be a terrible choice. While there's nothing wrong with trusting your gut, never make a decision based on panic and fear.
4. Don't Fall For Scams
The natural inclination for crypto investors is to identify a new altcoin with the potential for growth, invest heavily when it's still inexpensive to do so, and then reap the rewards when the value increases. That being said, the altcoin market is growing so quickly that many new digital currencies hitting the market might not be good long-term investments.
It might be galling to be cautious when it comes to investing in new altcoins as they hit the market, but doing so shields you from being involved in a scam in the making. Being screwed by a pump-and-dump scheme – something that happens all too often in the world of cryptocurrency – can keep you from watching your investment disappear overnight.
Even worse are proprietary altcoins that are available only through a closed system. These coins – usually pre-mined by the company that created them – are only tradeable within this company's closed system, and are extremely susceptible to value manipulation. Be exceedingly cautious before investing in one of these types of altcoins.
5. Don't Select The Wrong Exchange
Just as the number of altcoins hitting the market is growing exponentially, the number of cryptocurrency exchanges that you can trade these currencies on is also increasing.
The problem is that not every new exchange is created equal; new and untested exchanges could turn out to be a nightmare in the event they don't honor withdrawals or become inaccessible at the wrong time.
Begin your crypto trading career with long-standing, well-respected exchanges that support a wide number of already established digital currencies. While it may seem like you're missing out on an opportunity by doing this, keep in mind that the ability to reclaim cryptocurrencies from unknown, untrusted companies can be next to impossible.
Watch Your Step & You Won't Fall
The world of cryptocurrency trading is by turns exciting, exhilarating, and terrifying. You don't want to end your crypto trading career before you've even gotten started, so ensure that you take conservative risks until you've garnered some more experience.
Novices can easily fall through the cracks of this highly complex world, especially when it comes to altcoins – and missing these pitfalls is even more likely if you're inexperienced. However, these five tips should help you navigate these murky waters and come out the other side without losing your shirt. This leads us up to our next point in the pecking order.
Cryptocurrency Investment Advice – Top 4 Trading Questions To Ask
Aside from giving a full investment disclaimer that nothing on this website should constitute as financial advice or professional investment consulting, let's jump right into this portion of our industry-leading cryptocurrency trading strategy guide. Anytime you are planning on investing in a new form of cryptocurrency, there are four important questions that you need to ask yourself:
- Does the purpose of the company that is behind the currency make sense to me?
- Do I want to support the company that is behind the currency?
- Do I think other people will want to support the company that is behind the currency?
- Are there any perks to investing in this specific cryptocurrency?
Every form of cryptocurrency has its own unique flavor, by which I mean that every alt-coin has something about it that is special and unique. Many businesses have begun creating and using their own forms of cryptocurrency to help support investments into their growth and success. When dealing with these specific types of alt-coins, the company that’s behind them can be as important as the currency itself.
Let’s take a deeper look into the four questions for more details.
1. Does the purpose of the company that is behind the currency make sense to me?
At this point it is important to do your research and learn everything you can about the company that is offering this alt-coin. By trading in this specific alt-coin, you will actually be investing in the company. Because of this, it’s important to know exactly who you’re investing in and what the company is all about. You should be able to look at their website and locate in less than one minute all of the information necessary to determine who the company is, what their goals are, and how to become a part of it. If you can’t find that info easily, it may just mean that their online presence is poorly developed. However, it could also mean that they aren’t legitimate and you may not want to become involved with them.
Now that you know everything you need to about the company, you need to learn about the technology used in the alt-coins themselves. You don’t necessarily need to be a technological savant, but you will need to understand the basics of how cryptocurrencies work in order to do this. What does their blockchain consist of? What is the value of this alt-coin when compared to 1 Bitcoin? How easy is it to get one? It’s also important to figure out what the community surrounding the coin is like, because you what to make sure it is adequately decentralized.
If you can easily explain to someone else what the company is all about and what they stand for, you’re good to go on this step.
2. Do I want to support the company that is behind the currency?
If you don’t feel like you can really get behind the company and what their all about, then it might not be the best choice for you to invest in it. Whether it’s something you just don’t find interesting or it’s something you don’t believe has a good chance of success, both are a good indicator that you won’t make the best investment decisions when working with them.
On the other hand, if you can see yourself getting passionate about what they do, or at least see it as a clear improvement over the alternative, then it makes sense to invest in their success. The more you believe in what the company is doing, the more likely you are to make smart choices and you can trust yourself ot make the right decisions when investing in their cryptocurrency.
3. Do I think other people will want to support the company that is behind the currency?
This can often be hard for us to admit to ourselves, but just because we really like something doesn’t always mean that other people will. Unfortunately, when you are investing in a company’s future you need to know that you won’t be their only fan. If there is only a small group of people interested in the what the company stands for and hopes to achieve, it may not be enough for them to actually achieve success.
It’s important for you to look at the company objectively and determine whether they truly have an offer that will appeal to their target market. If they don’t solve the right problems for the right people, they’re not likely to come out on top.
If you can see a good number of other people getting excited about what the company offers for the same reasons that you are, then you may be on track with something that is worth your time and investment.
4. Are there any perks to investing in this specific cryptocurrency?
This question has less to do with the company offering the cryptocurrency and more to do with how they ar offering it. Many companies will want to incentivize use of their specific alt-coins by including perks for purchasing them or advantages in the market. You need to determine if there is something about using the coin itself that is better for you than using other types of alt-coins.
Some alt-coins offer launch specials when they are first released, or bonuses to trade values when trading between specific types of cryptocurrency. Others offer incentives for being a part of their community, such as interest that accumulates based on how many of the alt-coins you have in your wallet. Not all communities offer any sort of incentive at all, so researching what may or may not be on offer can help you to decide if the investment will be beneficial for you.
Last Pointers for Cryptocurrency Investing Advice
No matter which company’s cryptocurrency you’re looking to invest in, it’s important that you have answered all four of these questions before you make your decision. You should only move forward if you can firmly answer “Yes” to each question.
For many forms of alt-coin, the only thing most people worry about is the monetary value of the coin itself and the tech or coding that it runs off of. However, it’s important to remember that many of these alt-coins are investment tools for specific companies, and as such, the success or failure of the company is closely tied in with the value of the cryptocurrency itself.
Cryptocurrency Trading Strategies – Legit Profitable Investment Tips?
Bitcoin trading is a new concept. Ten years ago, “cryptocurrency” was a foreign word. Today, cryptocurrencies have a market cap of over $100 billion USD.
Despite that enormous market cap, there are few good tutorials on bitcoin trading strategies. Today, we’re going to help by listing some of the introductory things new bitcoin traders need to know before they begin.
Understanding the Nature of the Bitcoin Market
The first and most important thing you need to know about bitcoin is that people aren’t really treating it as a currency right now. Sure, you can spend bitcoin at a growing number of places around the world. People have bought houses with bitcoin. Some people have contactless bitcoin debit cards they can spend anywhere in the world.
However, most investors aren’t treating bitcoin as a currency: they’re treating it as a financial commodity that might provide a return on investment.
The value of bitcoin comes from its potential uses. Bitcoin completely bypasses traditional banking institutions. It removes third parties – with all their fees and slowdowns – from the financial system. It broadcasts transactions to the network (the blockchain) in a transparent way.
Like many unknown commodities, bitcoin is subject to price volatility. Some investors see this as an opportunity, while risk-averse investors want to stay away.
Bitcoin isn’t just an unknown commodity: it will always be an unknown commodity. Bitcoin doesn’t have the fundamentals that investors typically use to analyze an asset. Most stocks or bonds can be analyzed based on some trait of the instrument. Stocks have P/E ratios and dividends, for example, while bonds have return percentages. Bitcoin has no fundamentals that can be easily measured.
Bitcoin trading occurs on exchanges. These exchanges accept your fiat currencies (like USD and EUR) in exchange for a cryptocurrency (like BTC). These exchanges maintain a liquid pool of bitcoin, allowing users to withdraw their bitcoin at any time. Investors who wish to trade on that exchange can deposit bitcoin into their personal wallet on the exchange, or make a wire transfer to the exchange’s bank account. The exchange notices this transfer, then credits your account.
At that point, you can begin trading. You can submit market or limit orders. The orders will be filled as soon as your buy/sell order can be matched to a corresponding one. Most exchanges only offer this limited structure for placing orders. However, a growing number of exchanges now allow more complex orders, including the option to go long/short on a stock and to employ leverage.
You’ll find that different exchanges cater to different markets. Today, most countries have at least one cryptocurrency exchange specializing in their own currency. There are exchanges that can accept New Zealand Dollars in exchange for bitcoin, for example. Other exchanges are known for certain pairs. Bithumb, for example, has particularly strong liquidity in the ETH/KRW (South Korean Won) pair at the moment (and it’s easily the most popular cryptocurrency exchange in Korea).
CoinMarketCap.com has a ranking of the top bitcoin exchanges by their 24 hour volume. Anything in the top 50 allows for good liquidity. However, you can also sort the list by specific currency pairs – so if you want to trade in a more obscure cryptocurrency, you can find the market with the best liquidity.
Bitcoin Trading Technology
Most bitcoin traders make their own trades manually – just like you would execute ordinary trades. However, bitcoin trading technology has improved by leaps and bounds over the past few years. Today, automated bitcoin traders use algorithms to analyze the market, then adjust their portfolios as necessary.
Typically, these companies keep their trading strategies a well-guarded secret. Some companies allow you to purchase their bitcoin trading system, then let it make trades on your behalf.
Unfortunately, bitcoin trading is kind of like the Wild West. Some companies will lure in newbie investors with promises of doubling their bitcoins in 90 days. In reality, automated bitcoin traders shouldn’t guarantee any profits.
Remember that Most Traders Lose Money and Quit Within a Year
Whether you’re day trading stocks or you’re trading cryptocurrencies, most traders will lose money and give up within a year.
However, there are a small number of traders who can earn consistent profitability – even in markets as unpredictable and volatile as cryptocurrencies.
Touching on the Brutal Irony of Cryptocurrency Trading for Investors
Closing Crypto Trading Thoughts: The Brutal Irony Of It
Through the worlds of social media, it's almost become a rite of passage that we, at some point in our time online will be approached by one of a veritable legion of ‘Introducers'. Along with making themselves a general nuisance to those on either platform, they falsely peddle their ‘access' to a range of Bitcoin traders, along with espousing their ‘special offers' from a wide range of amateur Over the Counter (OTC) trading desks.
One thing that we'll find ultimately is that they contain far more hot air than the do contacts, and that their ‘trading desks' ultimate strategy boils down to just calling wholesale markets and peddling their bootleg marketing strategies within the bitcoin ecosystem.
It's one of the true, and very incredible ironies that comes from this industry, especially when we take into consideration some of the underlying objectives set out back in 2008 by Bitcoin – which is to provide as clean a shot between two peers, and, as a result – remove the middlemen – which getting rid of unnecessary friction laden costs within the financial world.
Fast forward ten years down the line, and who are we seeing as a persistent and acutely annoying body that has surprisingly grown in spite of this objective? Middlemen. It's irony at its worst, therefore, that we see far more bitcoin trading being conducted by middlemen than from the world of traditional finance. It's because of this that, instead of seeing trading costs decrease over time, we have seen them climb even higher, actually outstripping non-digital asset trading.
Now, before we delve further into the world and ridiculousness that has come to be known as the market structure of what we now know as the crypto trading market. It's important to illustrate the fact that I am one of those that has their flag thoroughly flying for the future of cryptocurrencies and blockchain technology. As a result, I am fully on board with seeing cryptocurrency revolutionize the marketplace that we see, often in our peripheral vision, while Blockchain revolutionizes everything else.
One of the reasons why I think that cryptocurrencies have this potential is because of my own thinking when it comes to cryptocurrency exchanges, and how it can work to really simplify the process, supplying clients from all across the world with the same asset which can be immediately paired with any currency or commodity in the world, including against stablecoins.
It is with this kind of potential in mind that we can easily see the niche that the middlemen in the market had, steadily start to erode into an antiquated tool of the past, due to them only being able to operate wherever their geography confines them to, or wherever regulations force them to adhere to and serve.
But in order to be a true believer in this, we have to identify the fact that, for being one of the very rare products that espouse a path to eradicating these middlemen, it has fast become one of the markets in which middlemen are the most prevalent.
Hypothetically, if we had one investors that was being ‘represented' by one of these ‘introducers,' and that same introducer was able to ‘win' thanks to their successful procurement of that one investor. This very same ‘winner' then goes on to contact five OTC desks in order to do what he refers to as ‘Sourcing liquidity' on behalf of their client.
Once they've made a choice on the desk, that desk goes on to contact three additional market makers, from which it can choose one to instigate the trade.
Once this market maker has been selected, it then provides its chosen client with a set price, after doing its own research on where they believe that they can trade this kind of order. The transaction is then completed with the aforementioned client, with the market maker managing to trade out their position through this exchange.
One of the major and glaring issues that come with this kind of trading model is that it's very much like a telephone game. And, as a result, is a highly inefficient, time-consuming system. This kind of system also means that there is a commission based spread taking place across four counterparties, which makes no sense and is rife with price gouging.
What makes this whole system increasingly worse is the fact that each of these entities, from ‘introducers' to the Over the Counter Desks and even Market Makers contacted through this whole exchange are fully aware of the existence of this kind of order. What this means is that the price agreed to by the investor needs to be agreed upon and subsequently acted upon by all parties, meaning that, often, by the time that these trades are set up, the market value has fluctuated negatively or positively, putting a great deal of the cost on the investor.
While we may resign ourselves to thinking that this option is the only one to make when looking to invest in bitcoin, it is really not the case. There are some good options out there for budding investors interested in trading in bitcoin and looking to do it with as much efficiency as possible.
The best kinds of examples that we can see include a range of larger scale wholesale markets and market makers that have since developed and implemented a high-quality framework of systems for trading across a range of exchanges along with other market makers.
Along with this, there is a range of agent desks along with smart order routing systems which have since been established to support new and existing investors. While the presence of these kinds of services does inspire a greater level of confidence for those interested in investing, placing ourselves into their shoes, however, it is genuinely challenging to find out which trading desk is really the best for the needs of the individual investor.
In order to really help streamline your search as an investor. Here are some of the following questions you need to ask when looking at a specific trading company.
First – Is It Trading Against My Current Order Flow As A Matter Of Principal?
Example – Does It Take On The Opposite Side Of Trades Using Its Own Capital?
This is the first question simply because it is one of the most important ones that you need to be able to answer when it comes to the trading company that you're looking at. It tells you straight away whether you're looking at a company that has a proprietary trading desk or not.
Should the answer be a yes, it's not really a good or bad kind of answer, but there are some important factors, whichever way the question is answered – One of the positives is that you are going to likely be trading with an entity that doesn't have to pay some amount in commission to an intermediary entity.
But with this in mind, you should only look to conduct trades with them if they contact you first. The reason for this is because, while no intermediary is good, if they have a proprietary trading desk and are using their own capital, continuous trading on this desk will result in you paying more than at other platforms to spread the risk.
Alternatively, or in addition to this, you can take the alternative measure of getting in contact with multiple desks in order to really source your trade. The problem with this, however, is that you would then be leaking a great deal of information into the markets. And a good number of desks will occasionally ‘pre-hedge' their digital assets ahead of going ahead with the initial trade.
While this can give you a better understanding as to what price cryptocurrencies are trading for, but this can result in the very expensive activity of asset ‘frontrunning,' which can result in the price ramping up against your better judgment.
By comparison, if the desk that you researched does not take part in committing capital to trade, that is not strictly a good/bad thing either. This really depends on the kind of process and relationships that they have with their investors. If they're operating as some kind of agent with a system of ‘natural' counterparties that commit to these kinds of trades, or operate using a more sophisticated kind of trading platform, these can provide a great deal of value to all parties in involved.
When it comes to these ‘natural' counterparties, though, it is wise to be initially suspicious of those that claim to be operating within the cryptocurrency market, as these often turn out to be false more frequently than true.
Second – Where Exactly Do These Firms Source Liquidity From? How Do They Source It, And What Does It Normally Charge For This?
Is It A Charge Which Is Reflected As A Kind Of Commission? Or Is It Reflected In The Price Of The Investment?
One of the other important questions that you need to ask as well is where exactly your Over the Counter desk is getting its liquidity from exactly. One of the immediate red flags that you should be able to see is if this desk relies almost wholly on other OTC desks in operation – do not use it.
The logic is why would you want to use an intermediary desk in order to converse and pursue trades depending on what another trader would do when that same trader can deal with you directly? With this kind of system, you are effectively paying for a whole other desk that merely serves as a trading switchboard.
Along with this being wholly inefficient, along with time and money consuming system, it also means losing a great deal of control over the various orders you would want to pursue. Unfortunately for many of us, these desks are very commonplace and are actually the majority of OTC's that are in operation out there in the cryptocurrency market.
Lastly – What Kind Of Electronic Trading Tools Does This Company Make Use Of?
And How Does It Engage With More ‘Public' Markets?
If you have an OTC desk that makes use of either a combination of single exchanges or of Over The Counter desk systems, this can make for an extremely suspect system.
It's almost impossible for any trader, no matter how accomplished they are, or what kind of setup they have, to simultaneously make an acute assessment of all markets, while . also making a precise calculation of all the optimal pieces of a given order to send across to markets over the complete life of a single order.
One answer that you should be looking out for however is whether the desk has some kind of algorithmic trading system in place, one with the highest degree of connectivity possible, so as to give you the fast and accurate data.
This one is a pretty self-explanatory statement when it comes to other asset classes out there, but doesn't hold as true for the crypto market. With the presence of such tools within the trading world in existence, it's time for investors in the crypto world to take a far closer look at these pieces of software and begin to insist that agents make use of them as well.
In summary, it is high time that we begin to demand a far better quality of service from those crypto markets out there, rather than just settle for the current sluggish and inefficient system that we're getting. These same markets need to spend more time caring about obtaining the best possible kind of execution. And, as a result, making them and their investors a far greater level of returns while simultaneously improving the market.
Happy cryptocurrency trading bitcoiners! May the winning tides and long term bets on bitcoin pay off.