Cryptocurrencies are back in the game in 2019, and with prices of large-cap tokens rising impressively, more traders and investors are thinking to diversify their portfolio with crypto. There is, however, an interesting detail about this year’s cryptocurrency rally. The rise in prices had been driven, among other factors, by the appearance of new investment vehicles.
Ordinary people and corporate investors are now able to invest in futures contracts on CME or trade the price of Bitcoin, as well as other important tokens, with companies like easyMarkets. Despite a more diverse investing and trading tools, differences between crypto trading and traditional investing remain.
Technical analysis harder to implement
Not everyone has a lot of money like Warren Buffett, who is still an advocate of value investing. Technical analysis is one of the most ideal tools traders and investors use to anticipate future market moves, based on past performance. However, if forex, indices, and ETFs are liquid instruments, not the same can be said about cryptocurrencies. Having said that, there are now crypto trading bots that watch the market on your behalf 24 hours a day, seven days a week, and predict fluctuations of bitcoins.
There much lower liquidity and as a result, technical levels do not work the same way they do on the traditional markets. Limited liquidity means you’ll find less accumulation of buying or selling orders around technical levels. Choppier activity will usually be spotted around important support and resistance levels, given that market participants do not commit the same capital as with the most popular markets.
Market sentiment unveiled
If we talk about traditional markets, market moves take more time to form, especially in the case of bullish moves. That’s because we have big liquidity behind any rally and it takes a lot more from counter-trend players to reserve the course. Market sentiment does not fluctuate violently, excluding big events, but not the same can be said about cryptocurrencies.
Cryptocurrencies are more sensitive to fresh news, even though sometimes they prove to be false. As a result, market sentiment can take a 180-degree turn even in a few hours, catching off-guard unprepared investors. With so many wild swings, it’s much harder to find opportunities, while keeping risk parameters on a sustainable path.
Because of that, we should have a different set of rules for investing in cryptocurrencies. Many experts claim that’s necessary because crypto is an uncorrelated asset. Although that’s questionable, it’s true that the cryptocurrency market is moved by completely different factors and as a result, how we approach it should be different, as well.