What to consider before investing in cryptocurrencies

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Updated: 04 March 2020

It is hard to believe that we are still only a decade out from the initial retail transactions using Bitcoin. Since then, cryptocurrencies have progressed to become a popular and well-understood market sector for many online traders, with a market capitalisation that has exceeded $220bn (£170bn).

While the online trading world has embraced the cryptocurrency revolution, traditional financial institutions have lagged. Bitcoin and other cryptocurrencies recently became national news, hitting the headlines of mainstream publications and websites across the UK and the world. Story after story of long-term cryptocurrency investors finding fortunes in “forgotten” accounts came to light.

Unfortunately, there were also stories of just how hard it was in practical terms to cash out on these fortunes. Cryptocurrencies do not yet have regulation by central banks, and investors hold them anonymously via electronic identities. This provided financial institutions with unprecedented problems. UK mortgage lenders, for example, found it hard to trace the source of the money, which put them at risk of breaching anti-money-laundering regulations if they allowed use of the cash in UK property deals.

These problems, while not insurmountable, caused many investors to pause for thought and reassess their crypto trading strategies. The many investors still devoted to trading Bitcoin and other cryptocurrencies have a few important points to keep in mind.

Cryptocurrencies never became the retail currency that they might have become

Early advocates of Bitcoin were convinced that the currency would become widely accepted by retailers worldwide, replacing major credit cards as the preferred, and even default, way to pay for transactions online, electronically and eventually in real life. This simply never happened, and there are still major hurdles involved in merchant acceptance of cryptocurrencies.

While merchant acceptance will potentially expand over time, no one trading cryptocurrencies now has the optimism of those early adopters a decade or so ago. It is doubtful that any cryptocurrency, even Bitcoin, will ever catch up with the now globally established credit card industry, and it is reasonable to doubt that the system infrastructure could handle the load if it did.

Cryptocurrencies are still volatile

One of the reasons why cryptocurrencies continue to be attractive tradable instruments but unattractive currencies is their volatility. Every Forex trading expert knows that while volatility can allow for quick gains (and losses), it is not an attractive long-term quality in a currency needed for regular real-world transactions. Successful real-world currencies need stability, at least most of the time, meaning that any cryptocurrency traded today is still a long way off from replacing other non-digital currencies as a retail payment method.

Even the widely accepted king of cryptocurrency, Bitcoin, remains highly volatile. So, trading based on frequent price action can be profitable, but you should still view and manage long-term investments with a solid risk management strategy in place.

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New cryptocurrencies are particularly unstable

While Bitcoin and certain other cryptocurrencies are now well-established, there are now an estimated 1,500 cryptocurrencies in operation, trading on almost 200 exchanges globally. This is a worrying development, especially considering the democracy of information (and misinformation) that the World Wide Web has become. New cryptocurrencies hit the market regularly, with the frequency of Initial Coin Offerings often rising fast.

A spurt of new sites and forums followed, ramping the new currency with glowing praise and unrealistic predictions. With anyone able to throw up a website in minutes and the ease of ranking for a keyword in the name of a new currency (that was previously a non-existent word), the misinformation flows quickly, catching the unaware with potentially disastrous results. Popular user-generated sites such as Wikipedia and Reddit are finally having to put measures in place to rein in the rampers on the cryptocurrency pages and forums.

Cryptocurrencies are big business now

Perhaps the most disappointing aspect of cryptocurrencies’ development over the last decade for many of their early advocates is that they never really evolved into the highly disruptive, technological breakthrough that was set to destroy the power of central banks and carve a new, libertarian, financially free future for us all.

In the beginning, cryptocurrencies represented for many an uncontrollable, unregulatable, brand-new beast of a currency that the authorities could not regulate. As cryptocurrencies become more mainstream and popular, it is becoming apparent that this is not how things are going to pan out. As is often the case, cryptocurrency trading is becoming a victim of its own success. With that market capitalisation of USD$220bn, the industry has become big business, which has made the financial sector extremely eager to make sure that cryptocurrencies are properly regulated.

Whether traders feel that this is a good or bad development will depend on the individual trader’s perspective. Even the idealists who were convinced that Bitcoin was set to take over the world were unhappy to find that their cryptocurrency profits were unspendable by traditional financial institutions wary of money laundering. This, combined with the fact that there are still so many issues with merchants accepting cryptocurrencies in retail transactions, has dampened the libertarian ideals of the cryptocurrency revolution.

Now, for many traders, regulation is a good thing. Lack of regulation is, no doubt, exactly what is keeping many keen CFD traders out of the crypto market. Concerns about anonymity, illegal Bitcoin transactions and the general lack of transparency involved in the industry are discouraging the more conservative. Additionally, the traders who are doing just fine with what they have do not see the attraction of expanding into an unregulated market unless the returns are considerably more attractive than regular Forex trading and other forms of CFD trading.

If you have considered all of the above and are still interested in learning more about trading cryptocurrencies and how it might fit in with your current CFD trading strategies and objectives, then you should take a look at our comprehensive introduction to trading in the cryptocurrency sector.