Blockchain technology has the potential to transform our financial system. With innovation comes the opportunity to make money. There are many professional traders jumping into the crypto markets to increase their win ratio. Many retail traders have lost their edge in the legacy markets due to a high level of competition from investment banks and high frequency algorithms.
Cryptocurrencies are still relatively new, so the markets aren’t dominated by institutional investors. Massive price gains of +1000% and wild swings of volatility are a common occurrence in the crypto markets. The high risks associated with crypto scares off many people but for seasoned traders these wild markets can be paradise.
Here is a list of four reasons why cryptocurrencies are the most profitable market to trade:
#1: Crypto is a free market
Welcome to the wild west where almost anything goes! There are many crypto exchanges that operate in jurisdictions with little to no regulation. The downside to an unregulated market is that whales can play manipulation games such as inside trading, pump and dumps, spoofing and wash trading.
Yet the biggest risk is losing money by having the exchange go bust. Deposits held on exchanges are generally uninsured, which is likely the main reason why financial institutions won’t risk money in these markets.
Although crypto comes with its own set of risks, the profit opportunities in a free market can be much higher. For starters, there are no circuit breakers to freeze trading when prices go south. Traditional markets often have a cool down period during major sell-offs. With crypto, if the markets crash then things just play themselves out. This leads to greater volatility so traders can take advantage of price inefficiencies.
Unlike most regular markets, cryptocurrency trading runs 24/7. A free market that never sleeps tends to have cleaner price patterns for trade analysis.
#2: The crypto markets aren’t dominated by high frequency super computers
Large investment banks spend millions of dollars in super computers to have a competitive edge over other traders. These computers can run high frequency algorithms to trade in a matter of microseconds. Retail investors trading from their home computers can’t compete with the processing power of these algos.
There are many ways that high frequency algorithms can game the system. The most common being front running trades with flash orders. In other words, an investment bank can intercept trades microseconds before they process and sell them for pennies more than the original order.
Some algorithms will purposely disrupt price patterns to work against typical trade analysis.
#3: The crypto markets are driven by dumb money
In the legacy markets, individual traders are competing against multi-billion dollar institutions. Again, these large players have the budget to buy super computers and hire teams of full-time professional traders. Trading is a zero sum game and small players just don’t have the resources to compete against the bigger fish.
The barrier to entry for trading bitcoin and other cryptocurrencies is much lower. Anyone can start trading with just a few dollars and minimal registration requirements. What this means is that there are more individual traders and less institutions.
Most individual crypto traders are probably not full-time professionals and do it as a side hobby from their regular day job. Amateur traders are more inclined to make emotional impulsive trades which has the effect of creating price inefficiencies.
Dumb money is a technical term used to describe traders who buy high and sell low. They emotionally chase the markets and buy when prices spike for fear of missing out and panic sell at a loss when the markets crash. Markets driven by dumb money tend to be more volatile and easier to predict if you know what you’re doing.
#4: Quick settlement and arbitrage
Buying and selling stocks comes with a delay in settlement time. The transaction date is the time of execution but settlement can often take up to three days. This delay is caused by inefficiencies with the underlying technology. Settlements are often processed through centralized companies such as the Depository Trust and Clearing Corporation (DTCC.)
Some financial institutions have figured out a way to exploit delayed settlement times through naked short selling. They short stocks without actually having borrowed them first. This can have a damaging effect on companies by lowering their stock valuation.
Blockchain technology speeds up the settlement time to just a few seconds. There is no one single crypto exchange that determines the price, which means that there are often discrepancies in the markets. This sometimes leads to arbitrage opportunities where traders can purchase cryptocurrencies on one exchange and sell them on another at a higher price.