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Risks of Trading Bitcoin vs. Traditional Assets

Risks of Trading Bitcoin vs. Traditional Assets
Written by
Alex Carlson
Published on
November 23, 2020
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Bitcoin trading activity had been on an ascending path throughout the year and as the price continued to rise, retail interest in the largest cryptocurrencies surged. Recently, BTC smashed $16,000 and there are plenty of analysts forecasting an even larger bull run that could take valuations towards the all-time high. Increased volatility had facilitated Bitcoin trading especially in the short-term, but that also comes with several risks traders need to be aware of.# Higher volatilityAs compared to traditional assets such as stocks, indices, or currencies, Bitcoin is more volatile and thus creates multiple challenges for traders. It becomes increasingly difficult to find optimal entry locations and they need to place larger stop losses. In such an environment, risk must be reduced, so in case the market will move in the opposite direction, losses will be minimized.Elevated volatility could sometimes mean choppier markets and less directional bias, generating sharp corrective moves and the inability to understand the price action context.# Speculative natureMost of the big traditional investors continue to be doubtful about Bitcoin and its ability to preserve a high valuation over the long term. People like Warren Buffett or Charlie Munger continue to be BTC critics, even though valuations had already proven several times to be able to rebound sharply.What this suggests is that Bitcoin still has a speculative nature, something that is beneficial for traders. Bitcoin trading is an activity focused on the short-term price developments and has nothing to do with the implications of fundamentals on the long-term prospects.Does BTC have an inherent value? Some could say yes while others could argue otherwise, but as just bits of information stored on a distributed ledger, Bitcoin remains subject to speculation, as long as mass adoption won’t be achieved.# Under-developed marketLaunched in 2008, Bitcoin has a 12-years history, which pales against stocks or commodities with hundreds of years worth of trading data. Based on these numbers, it would be fair to say that Bitcoin is an asset still in its infancy, and based on how other similar assets had been performing historically, it is subject to persistent volatility and unstable valuations.On one side, large price swings are good news for traders, but at the same time, represent a risk worth considering. Trading can include going long or short on BTC, and when the market does not perform as expected, the usage of risk management tools will reduce downsides.# Mass adoption under questionThe main goal of Bitcoin and cryptocurrencies was to come as an alternative to fiat currencies. However, mass adoption is restrained by factors such as lack of regulation and the fixed supply of BTC that could be mined. What the future might bring for Bitcoin in terms of adoption is clouded by uncertainty, but in the meantime, it is treated as a payment system or financial asset.With the rising prospects for CBDC (central bank digital currencies) could Bitcoin start to lose its competitive advantage over government-created money? Cryptocurrencies continue to change due to blockchain innovations and BTC could continue to benefit from its leading market position. Image courtesy of https://pixabay.com/illustrations/euro-transformation-digital-5094284/

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