Five Things Traders Should Consider When Entering the Crypto Space
The price of Bitcoin (BTC) is touching levels it hasn't seen since December 2017 when it hit its all-time high around $20,000. Then over the following year, Bitcoin proceed to give back about 80% of its value.
As the Bitcoin market of 2020 appears to be replicating the 2017 market, some say it's different this time, and that the difference is like night and day. Still, traders should consider five things before they leap into the cryptocurrency market.
1. It's a Volatile Market
Bitcoin has been closely correlated to stocks this year, although it's more volatile and moving at a faster pace. While the stock market is up about 50% from it March low, the S&P 500 is only up 10.4% year to date. Meanwhile, bitcoin is up approximately 150% this year (Nov. 18). Other cryptocurrencies, such as Ethereum (ETH), have also experienced big rallies.
With a huge rally like that, it's possible Bitcoin could experience a crash similar to 2017. However, if the stock market should stall as the COVID-19 pandemic gets worse, we might see a decoupling between the two asset classes as people look to cryptocurrencies as a safe haven for holding value.
2. Hedge Against Inflation
One of the major benefits of Bitcoin is that there is a finite amount of coins. Currently, many people are worried about the Federal Reserve Bank's expansionary monetary policies. These policies include lowering interest rates to save the economy during the pandemic, which could spark a surge in inflation, and quantitative easing -- which is essentially printing more money.
Printing more money devalues the U.S. dollar, decreasing its purchasing power and making it less trustworthy. During the pandemic, both the dollar and the European Union's euro have been devalued. This could affect the dollar's position as the standard for international trade and finance.
Already in countries where their home currency is failing and suffering from hyperinflation, such as Venezuela, Argentina and parts of Africa, people are turning to crypto as a way around restrictions on holding foreign currency.
The more money that's printed the more the currency is debased. People are looking at cryptocurrencies as a store of value and inflation hedge comparable to gold.
3. More Reliable Platforms
There is currently little regulation of cryptocurrencies or their exchanges. In the early days of the crypto market there were fraudulent exchanges and little security on real exchanges, which could result in hackings. However, expanded knowledge of the crypto market has let to expanded access to the asset on more reliable trading platforms. Webull has just launched Webull Crypto, which allows new and current Webull users the ability to trade cryptocurrencies on its platform. This came out of massive consumer demand, showcasing that, as cryptocurrency gains popularity, more and more traders have become interested, and are eager to jump right in.
4. Institutional Acceptance
While crypto is still the domain of small investors, the market is gaining more credibility and respect from large financial institutions. Even though the biggest banks in the U.S. won't trade cryptocurrencies, they are taking notice.
J.P. Morgan, a big crypto naysayer in 2017, created a digital coin last year and has since set up a dedicated crypto business. Recently, a team of J.P. Morgan analysts said Bitcoin is emerging as an alternative to gold among Millennials and could double or triple in price if the trend continues.
Mutual fund giant Fidelity Investments has invested in a Bitcoin mining company, and currently holds a 10% stake. It is also developing a cryptocurrency trading and custody service. In addition, Charles Schwab and Vanguard are also buying shares of bitcoin mining companies.
5. Bitcoin ETFs
The growing exchange-traded fund (ETF) industry has seen the increased demand for Bitcoin and is trying to bring to market a fund that holds Bitcoin. So far, the Securities and Exchange Commission (SEC) has not approved any Bitcoin funds for a variety of reasons, such as the reliability of custodians. However, there is currently a Bitcoin ETF in Sweden and it's only a matter of time before one arrives here.