Spot and derivatives in crypto
Published: 03:05 PM,May 07,2022 | EDITED : 07:05 PM,May 07,2022
The 17th week of 2022 was the usual rollercoaster in cryptocurrency. Some went up, some went down, and some went both up and down in a very short period of time. I wrote a column last week on various possible investments during a period of high inflation. In the article I touched briefly on cryptocurrency. That was enough to spark a LinkedIn conversation among some of my follower. Without a doubt, crypto is hot topic, and many are interested to know when it is a good time to go in.
As you read more and more news about retailers, financial institutions, and even countries opening up to cryptocurrencies, you might think that you are missing out on something spectacular. But I warn all readers that not all that glitters is gold, and before making any investment - being it in crypto or not - you should seek professional advise. Unless you are a professional investor or trader. In that case you should have already figured out your risk appetite.
First of all, when you read that a big player has opened up to crypto, make sure to read the whole story. Often the headlines are written to sound attractive. Do not forget that almost every news media makes money via ads, and they go “ka-ching” when you click on the title to open the article. Secondly, when you deep dive in the content, notice that in the largest majority of the cases, any claim of crypto adoption refers to Bitcoin. In some cases Ethereum. In other cases a stable coin. Rarely - I mean extremely rarely - you find articles that talk about the use case adoption of an alt-coin (alternative coins, aka tokens and cryptos with lower market cap).
Once the two points above are made clear, if you think you can afford to lose some of your investment, and your financial advisor supported your plan, you can look into the speculative investment in cryptocurrency.
The very basic entry point is to trade spot. That simply means that you buy or sell cryptocurrencies at the market price offered by the crypto exchange. In spot trading, you open a position by buying, and close it - or exit -by selling. This rewards you only when the prices go up. Simply put: you buy low, sell high. But sell to whom? Well, as spot trading occurs on a crypto exchange, when you exit a position you could convert your crypto into a stable coin. These are coins that are - arguably - stable, as linked to the value of the USD. Stable coins are useful because allows you to stop a trade, without leaving the exchange ecosystem. For example, if you want to stop a Bitcoin loss, or you want to take a Bitcoin profit, simply convert Bitcoin to USDT, and you are no longer affected by Bitcoin price fluctuation.
The more experienced traders also make money with derivative products. These are complex financial instruments that allow for speculative trading by longing and shorting investment positions. Unlike spot trading, derivatives may allow to earn when prices go down. When betting on prices going down, investors can borrow cryptocurrencies at current price, and profit the difference if indeed the price continues to decrease.
Regardless of spot trading or derivatives, cryptocurrency remains a risky investment.
As you read more and more news about retailers, financial institutions, and even countries opening up to cryptocurrencies, you might think that you are missing out on something spectacular. But I warn all readers that not all that glitters is gold, and before making any investment - being it in crypto or not - you should seek professional advise. Unless you are a professional investor or trader. In that case you should have already figured out your risk appetite.
First of all, when you read that a big player has opened up to crypto, make sure to read the whole story. Often the headlines are written to sound attractive. Do not forget that almost every news media makes money via ads, and they go “ka-ching” when you click on the title to open the article. Secondly, when you deep dive in the content, notice that in the largest majority of the cases, any claim of crypto adoption refers to Bitcoin. In some cases Ethereum. In other cases a stable coin. Rarely - I mean extremely rarely - you find articles that talk about the use case adoption of an alt-coin (alternative coins, aka tokens and cryptos with lower market cap).
Once the two points above are made clear, if you think you can afford to lose some of your investment, and your financial advisor supported your plan, you can look into the speculative investment in cryptocurrency.
The very basic entry point is to trade spot. That simply means that you buy or sell cryptocurrencies at the market price offered by the crypto exchange. In spot trading, you open a position by buying, and close it - or exit -by selling. This rewards you only when the prices go up. Simply put: you buy low, sell high. But sell to whom? Well, as spot trading occurs on a crypto exchange, when you exit a position you could convert your crypto into a stable coin. These are coins that are - arguably - stable, as linked to the value of the USD. Stable coins are useful because allows you to stop a trade, without leaving the exchange ecosystem. For example, if you want to stop a Bitcoin loss, or you want to take a Bitcoin profit, simply convert Bitcoin to USDT, and you are no longer affected by Bitcoin price fluctuation.
The more experienced traders also make money with derivative products. These are complex financial instruments that allow for speculative trading by longing and shorting investment positions. Unlike spot trading, derivatives may allow to earn when prices go down. When betting on prices going down, investors can borrow cryptocurrencies at current price, and profit the difference if indeed the price continues to decrease.
Regardless of spot trading or derivatives, cryptocurrency remains a risky investment.