Since cryptocurrencies proved to be investing instruments able to generate returns, a lot of people currently trading stocks are thinking to add them in their portfolio. Some want to know how to get started in stocks while also diversifying using crypto to profit from both markets.
Today we’re going to bust the myth claiming that cryptocurrencies are completely uncorrelated instruments and we’ll also share a few essential pieces of advice that might be useful.
Risk sentiment drives them both
Although cryptocurrencies are only 11 years old, they share a lot in common with stocks, if we talk about longer-term performance. Both crypto and stocks are instruments with low liquidity and high volatility, meaning the global risk sentiment heavily influences their price behavior.
Besides the first months of 2019, the last time we saw a significant bull run in cryptocurrencies was the second half of 2017. What did the stock markets do? They were making new record highs. The first half of 2019 had also been productive for most of the large-cap cryptocurrencies, while stocks around the globe recovered from a slump of December 2018.
Expectancy and investing behavior
The bigger potential returns are motivating most of the investors attracted to volatile instruments. Even though both cryptocurrencies and stocks could produce unexpected results in short periods, professional investors must be able to put both risk and the potential return in the balance.
Hunting for opportunities that generate returns in a few hours or days could be an exhausting process, which is why it’s much better to find opportunities that could last something between a few weeks to few months. Trying to find broader market moves will give you much more time to analyze the situation from different angles and make informed decisions.
Particular challenges in crypto investing
If you want to get involved in the cryptocurrency industry, you’ll need to be aware of some of the harmful consequences. Unfortunately, due to low liquidity and the lack of regulation, cryptocurrencies are still instrumenting subject to price manipulation. In this case, learning how to read price action and understand the market order flow will be essential in spotting situations where your ideas are wrong.
Also, investing in crypto using traditional exchange platforms may bring some negative consequences (hacking risks, lack of regulation, etc.) which is why most of the investors willing to invest larger amounts have moved to futures contracts trading on the CME, or other cryptocurrency-related derivatives.
The cryptocurrency market is trading seven days a week, and as we’ve seen in the past year, major price movements are happening on Sundays, when liquidity is very low, and some market participants can influence the price meaningfully. As a result, you’ll need to allocate a few hours during the weekend as well, to be up-to-date with all the latest developments.
Lastly, don’t forget to continually be aware of the difference between value and price, since this is the biggest trap beginners fall into, as their subjective thinking clouds what should be a detached and objective view of the market conditions.