1. Crypto is a quick path to riches
Cryptocurrency is an exciting asset class and right now, it has a huge potential to be more transformative than most technologies in history. Indeed, the momentous gains that have been realized so far by those who invested in Bitcoin and other cryptocurrencies as early investors and traders reveals the potential future influence of crypto.
However, although crypto investing and trading can make you rich, neither of them are easy paths to take. The massive drops after 2017 should remind anyone that cryptocurrencies are not a one-way street. It presents huge opportunity but is extremely risky.
It is absolutely normal and in order to expect high gains and huge profits in the day, especially due to huge price upticks in crypto, but most investors and traders who have been around for some time would advise having a long term goal and expectation about this kind of asset class. While short bursts up profit ladders can earn you huge profits, these are almost usually followed by huge downward trends, which makes you want to know the reasons and factors behind all these.
Furthermore, it is absolutely fine to inject your accounts with huge amounts of money and leverage high margins when trading, but it is more important to first sit down and understand the high risks involved before doing so, which then calls for the need to understand this highly volatile market and the forces that operate in it.
Promises of huge and sustainable gains and a near perfect product are familiar even within legacy structures such as banking. To be fair, it’s the way everyone would rather market their stuff, but for each dozen promises of huge returns, almost all of them will turn out to be scams or unsustainable in the long term when investor expectations can't be met.
That said, it takes time to fully understand crypto trading and to come up with a strategy that wins in the longer term is a skill that you can hone over time. Like investors, traders who succeed have a realistic expectation of the market they're in, based on tried, tested and truthful market information, as well as their own experience and trading skill. Trading is an art.
Besides, there's a high probability of market manipulation, trading errors and inaccurate judgements, inaccuracy of trading data, pumps and dumps, high volatility, and other risks, make trading a difficult path to survive on.
2. Funds are not safe on crypto exchanges
Most cryptocurrencies continue to be issued as utility tokens and not as stock or securities that, under the law, would guarantee returns on investment on a regular basis and which holds the business accountable in regard to securing and safeguarding investor money against loses. That makes stocks and securities truthfully appear as safer for the law-abiding who prefer non-risky investment.
Plus the recent hacks which have led to huge losses of funds on exchanges and platforms for both investors and traders make the crypto space appear more risky than it is, especially if the platforms involved are not under the legal obligation to secure and return customer funds.
However, this does not mean that crypto is completely unsafe to trade or invest in.
This is because the crypto exchanges are no longer the same businesses that we knew a few years ago. To clarify, they are largely more secure. Helping this trend along is the fact that the blockchain itself is still impenetrable to date (most hacks happen due to neglect on the part of owners and businesses, insider job, code errors/flaws and other issues as services are added or layered onto blockchain and most of these can be identified and rectified before it is too late) with almost all exchanges now having more aggressive and detailed security procedures and processes than ever before
Currently, it is not that easy for anyone to just walk into an exchange platform and steal cryptocurrency from a wallet unnoticed. These technological platforms have a level of security that is quite high, whether you are trading on a DEX or on a centralized exchange. Due to these additional security measures being taken to secure crypto exchanges against hacking and loss of funds in case of compromise, people now continue to trade huge amounts of money on crypto exchanges.
For instance, cold wallets, advanced HSMs (secure hot wallet methods), the use of multi-sigs, the use of regulated crypto custodial services, and internal security procedures that must be followed by employees and managers as well as by partners in addition to KYC and licensing, are some of the proactive measures being taken to improve security of investors' money. In addition to these factors, many exchanges also have plans for recovery in case of disastrous events like insurance.
There are also secure and safe steps individual traders can take to ensure there are lesser and lesser chances of losing crypto to hackers or due to other issues such as the loss of passwords. In general, the top ways to protect crypto as an individual include: 2FA, email encryption, strong password, good antivirus protection, and using a VPN.
Although it does not mean a trader should neglect the responsibility of securing his or her funds (owning crypto comes with a lot of responsibility), there are a lot of reasons to feel secure when trading on known and established exchanges.
Besides, cryptocurrency security breaches are not different from those in the traditional finance space where theft and security breaches are more common. Neither do those hacks and security breaches prevent people from using dollars or fiat in the future.
3. Crypto 'whales' control the market
In the case of most Altcoins, it's easy for 'whales' (a large volume trader or a group of similar, collaborative traders) to be able to post large sell and buy orders on any side of the sell and buy wall.
Still, this is increasingly hard to do on large market cap coins listed on tens of crypto exchanges. Plus there are factors that make it harder for this to happen: first one -- a discouraging factor for being a whale -- holding a huge amount of volatile coins that do not have a huge customer base is more a risk than an opportunity for a so called whale.
Even in the case of huge market cap coins like Bitcoin, tying up a large amount of money on a coin with a price that can drop significantly anytime is a high risk move because to tilt (manipulate) prices on high market cap coins would require extremely huge capital injections or withdrawals, which are increasingly difficult to do. Therefore, ideally, a pump and dump to work, the coin involved should be new and have a small market cap, while still being able to meet its supply and demand requirements successfully.
Second, unless the traders involved have a plan to exit completely, which happens anyway, then dumping a low market cap coin slowly piece by piece would make the price of such low cap coin drop so much that even whales may still suffer. Given this, they'll likely have to exert some form of pump again to increase prices and dump at a higher price or may simply have to wait for the coin's price to increase on its own to realize any sort of profit. Otherwise, they would lose money when selling at lower prices in subsequent dumps.
Beyond this, the factors controlling price of any single cryptocurrency are many and stretch beyond the activity of whales. To put it more correctly, whales don't actually control the market. If and/or when they try to manipulate it, what they are likely to do is to manipulate demand and supply with their large stores of coins in order to influence buying and selling moves and cause panic selling.
There were reports last year that only about 1000 individuals have $105 million worth of BTC each (or just 1600 wallets containing more than 1,000 BTC) which makes a crucial point that whales have an important role in the market controlling up to a third, but not all of it. For every crypto project, it is hard to imagine only one person would be a whale in the group.
That makes it really difficult to think a single person would sit behind a computer or whatever, controlling the market. A 1000, 100, 50 or even 20 strong group of whales could, however, try to sit down and agree on how to manipulate the market together. Still, there are reasons why collusion of this kind amongst crypto whales just doesn't work. What this means is they too would have different takes amongst themselves on how to execute market price tilting which is easier than colluding on the how, when and how to do it. Pumps are also expensive to execute and require many whales to collude to succeed. This basically means unless they agree on manipulation, then every whale would be out to make a killing for his or herself, which makes for different interests in the same market.
According to André Bruckmann, the founder of Mycro, price manipulation through "rinse and repeat" cycles is expensive given liquidity and benefits no one. For instance, if someone sells a large amount of BTC, the price will fall if it is placed at the market price, and this means those involved would lose money. At the same time, if a trader places a large buy order at the market price, the price likely rises and that means he would need to buy the same asset at a higher price.
That is supported by the fact that it is not easy for any trader or investor to quit completely from either holding or trading crypto, especially when there is anticipation of price improvement and this is only enhanced as volatility increases. Besides, market cycles dictate that there is always going to be spikes, making it even harder for even the experienced traders to quit completely by dumping coins.
Fourth point: to beat the chances of manipulation by whales, OTC trading is done by most exchanges today and it is on this market that large volumes are settled without affecting prices.
Fifth: Increasing market information on the side of traders is also making it harder for manipulations because everyone knows what that massively large order on the sell side of the sell wall means and will hold tight and do the opposite when it is time for the whale to try and pump. Furthermore, a pump tactic requires a significant amount of capital that it would require a group of whales to do it together for it to work, which makes it harder.
Besides, the actions of whales don't always suffice to manipulate prices. Case in point: the "BearWhale" incidence of 2014 where someone nick named by the community "BearWhale" tried to liquidate 30,000 BTC at a lower price of $300 to exit when BTC was trading at a higher price and the event was quickly noticed due to the high amount involved. It was then broadcast on social media and other traders/investors who never wanted to see the BTC price going down reacted by absorbing the BTC to flip the price back to a higher level.
Besides, there are regulatory efforts to combating manipulation of cryptocurrency as there are technological solutions.
4. It is too early/late to start trading cryptocurrency
Crypto's current low level of adoption shouldn't make you think it is not the right time to buy, invest or trade in it. Those who want to buy Bitcoin now wished they bought when it was priced at a few cents a coin, a few years ago. While there is no assurance that it will keep going higher in price, the long term benefits of holding some are clearly visible and over time, there is a lesser and lesser possibility that it will fold like a house of cards. If it is too expensive, like all cryptocurrencies, it's still okay to buy it in fractional amounts and accumulating positions in this way, while also trading in the lesser valued coins.
Crypto is no longer in its nascent phase. While you would rarely find people talking about crypto in 2014, after more than ten years of Bitcoin, there are also close to 5000 Altcoins on the market today. Keep in mind as well that 150 crypto hedge funds launched last year and more keep launching, and there is now more than one daily crypto show on US national TV, CNBC and Bloomberg that talks about digital assets.
5. Crypto is illegal
Most people in most countries are pro-law and categorize crypto as illegal or relate it to drug dealing and other activities that violate the laws of their lands.
However, on the contrary, only a small number of countries like Bangladesh clearly state that crypto is illegal by law. In most countries around the world, crypto may not be recognized as a legal tender but the possession, exchanging, swapping trading, and investing in it are all legal within most legal systems. Typically, in these cases, crypto is classified as a digital asset or commodity.