Cryptocurrency can be defined as a virtual or digital currency secured using cryptography. It does not rely on any banks for the transactions, and it is a peer-to-peer system that allows anyone anywhere to receive or send payments.
Major cryptocurrencies are present on decentralised networks using blockchain technology - a distributed ledger that is enforced using a network of computers. Cryptocurrencies are stored in digital wallets, and when these funds are transferred, the transactions are recorded in a public ledger.
This blog is going to discuss the various aspects of cryptocurrencies and help you understand the trading strategies to master fintech products.
What is cryptocurrency?
It is a form of digital currency that is used as an alternate payment form or speculated investment. Cryptocurrency is fungible, which implies the value will remain the same when purchased, traded, or sold.
Traditional currency can be held in a bank or a financial institute, and cryptocurrency is stored in a digital wallet. Even though there are no government regulations in the cryptocurrency market, it is a taxable asset.
Blockchain technology helps in recording and confirming cryptocurrency trades. It would help if you learn blockchain basics in order to understand what cryptocurrency is and how it works.
What is an asset class?
Asset classes can be defined as a group of financial instruments or securities that exhibit similar features and behave similarly in the market. Some common types of asset classes are bonds, real estate, stocks, cash, and commodities.
Every asset class has its risk-return profile, which helps investors diversify their portfolios and manage their overall investment risk. Investors can choose to invest in one or more asset classes according to their investment goals, time horizon, and risk tolerance.
Cryptocurrency: an asset class
As already mentioned, investors like to diversify their portfolios across several assets and asset classes. Traditionally, it only meant diversifying between assets such as stocks, bonds, or even real estate. However, investors have been showing interest in cryptocurrency, which offers them another path for asset diversification.
The development and adoption of an entirely new asset class was expected to be challenging. In the beginning, crypto assets had a number of risk factors related to the newly developed technology, uncertain government policy, and immense price volatility.
As investors started to embrace crypto as an investable asset class, the potential risks became more governance and systematic-focused. If you want to learn about cryptocurrency as an asset class, you must learn blockchain basics to have a clear idea about it.
Why are investors investing in crypto?
Investors are investing in crypto mainly to build their capabilities and gain experience. Crypto is a highly investable and growing asset that is here to stay. Investors recognise that crypto models are used for tokenising traditional assets to enhance asset liquidity and improve operational efficiency.
The sooner investors are able to understand the nuances of the crypto asset class, the sooner they can recognise and take advantage of emerging opportunities.
Investors are looking for ways to capture early advantage in the emerging web3 landscape. Venture capital players are looking for solutions and technologies to unlock the next internet iteration. They are also looking at marketplaces, crypto assets, and their underlying technology infrastructure.
Crypto trading strategies
According to a recent study, there are almost 516 million crypto users in the world today. If you are investing in crypto, you must be well-versed with the trading strategies of it. The act of buying and selling cryptocurrencies to make a profit is called cryptocurrency trading.
Potential financial risks can be eliminated with an efficient trading strategy. It allows investors to avoid making impulsive and rash judgments, which could cost them a lot of money.
Here are some of the common crypto trading strategies:
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Day trading
This crypto trading strategy entails entering and exiting a market position on the same day within the crypto trading hours. It is also referred to as intraday trading, as traders are generally started and finished within the same day.
The main goal of this strategy is to make a profit from the micro-market movements. Since cryptocurrency is volatile, day trading in the crypto market can be rewarding. Trading strategies are developed with technical analysis by day traders. However, it is a risky and time-consuming strategy which is ideal for advanced traders.
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HODL (buy-and-hold)
It is an investment technique in which investors buy cryptocurrency and hold on to it for an extended period. This allows the individuals to make a profit from an increase in the value of the asset.
HODLing allows investors to make a profit from long-term value appreciation when these individuals invest for a long period. Since they are not subjected to short-term volatility and are able to avoid the risk of selling low while buying high, that is why investors are able to benefit from it.
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Arbitrage trading
Arbitrage can be described as a trading technique in which traders purchase cryptocurrency from one market and sell it in another one. In this scenario, the spread varies between the buying and selling prices.
Due to the difference in trading volume and liquidity, traders are able to find the opportunity to make a profit. They register accounts on exchanges having a significant price discrepancy for the cryptocurrency that they are trading to take advantage of this opportunity.
However, traders had to pay a deposit, trading, and withdrawal fee twice, which reduced their take-home profits. Also, traders should be mindful of the price difference between the two exchanges.
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High-frequency trading
This strategy includes the creation of trading bots and algorithms that help in the speedy entry and departure of crypto assets. In order to design such a bot, traders need to thoroughly comprehend the complicated market principles with a proper understanding of computer science and mathematics. This technique is ideal for experienced traders.
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Scalping
In this trading strategy, increased trading volumes are used to book a profit. Scalp traders exploit market inefficiencies to make a profit. Scalpers study past trends and volume levels when deciding on an entry or exit point within a day. Scalp traders want highly liquid markets since it is highly predictable when to enter or when to exit.
You can master fintech products by learning about the various crypto trading strategies.
Conclusion
Cryptocurrencies are virtual or digital currencies underpinned by cryptographic systems. They allow secure online payments without any third-party intermediaries. In recent times, many investors have started to take an interest in crypto, which is considered an asset class. For investors looking for different assets to diversify their investments, crypto is a great option.
In order to master investing in cryptocurrency, you must understand the marketplace and the various trading strategies. If you want to master fintech products, check out the Advanced Certificate in Fintech course by Imarticus. This course will help you understand the impact of fintech on asset management, banking, payments and cryptocurrencies.
