Would you dare to invest in the markets right now, for any crypto-asset class running insane?
With talk of Wall Street stocks correcting soon, cryptocurrencies still near the hot peaks and the ever-present risks, what are the possible routes and risks for individual investors?
Within a few short years, and even within a few months, trading and investing has become a whole new game, with easier entrance, new groups of potential investors and new growth opportunities, but also pitfalls. We will explore how the latest trends and ideas in investing have been altered by online technologies, and most of all by blockchain systems and cryptocoins. We will also look at the proliferation of social trading platforms, where users can copy a trading strategy with a few clicks. At this point, it is hard to make a prediction whether the mix of technology and greed would create a new rising trend, or a perfect storm. Certainly, there are spots of hot gains as well as maelstroms of trading chaos that swallows up funds. Cryptocoins as assets are again on the front page news, with sharp rises and corrections, and still uncertain predictions of whether the current levels of the more respectable cryptocoins are sustainable.
Who are the Experts?
Investors want to enter a market and they want it now. For this reason, more and more social trading platforms have been popping up in the last few years.
What is social trading? It is a buy or sell decision for a chosen asset class, where the choice is made based on data from other traders. Either the data is collected from many small traders, or strategies are copied from professional traders. Twitter used to be a source of signals for social trading. But in recent years, social trading was made easier by specially built exchange platforms that support trading signals. The basic principle is that newbie investors merely open an account and automatically perform the same trades as other investors. The platforms allow new accounts with minimal personal funds.
The sources of trading ideas can differ. Some funds or platforms still track a big number of investors and scour Twitter or other networks for leads, indicators of interest or completed trades. Others build up prominent profiles for star investors, complete with a returns rate, and invite users to emulate the same strategies. The common thing is that social trading uses "user-generated content", instead of centralized expert opinion. And the "experts" often have "skin in the game" as they are trying to make profit themselves. The best investment stars to copy are those that are using their own funds.
The classical way of trading, asset picking and decision-making include vast, sometimes arcane knowledge. From fundamental economic analysis to methods sitting on the edge of plausibility (the jury is still out on Fibonacci sequences), a new trader would quickly become bogged down, discouraged or make trades merely on a whim, entering scams and pump schemes. Of course, with classical personal investment, a buyer could merely buy and hold certain assets, with a long-term view to gains. Another option would be to use an intermediary, with all the fees and hassle involved.
But opportunities move faster in the 21st century, and social trading allows new buyers to make informed decisions. Certainly, they may remain unaware of some of the information, but still the available behaviors and trends are based on reality. And there is always the escape valve of moving out of the market with minimal fees and documentation.
Social trading would also be a doorway for many into the world of cryptocurrencies. While only a couple of years ago talk of Bitcoin was relegated to personal conversations, the last three months brought the digital gold into the spotlight again. But what to do about Bitcoin? Buy and hold? Trade? And what about the thousand other coins and blockchains? Social trading may cut some of the risk of outright buying and holding, as well as limit exposure to toxic cryptocoins.
It is too easy to find the sites for a quick and easy decision to enter any asset class. Remember, trading on any platform, even if it is in good standing now, may be very risky. Only invest funds you can afford to lose. Here are five established or promising platforms which have some perks or reasonable security features: eToro, Trade360, ZuluTrade, MyDigitrade, Peeptrade and Collective2.
Additional apps and platforms are showing up all the time, and the popularity and mainstream outreach may change in months. With the spreading of cryptocurrencies as a new asset class, even some of the older exchanges may see challenges to their leading positions. In general, online trading spots constantly try to add new features, in terms of access or security. But with social trading platforms, there is the added security of a real-life community, available for advice and tips, chats and conversations. Even without a devoted expert, new buyers may find good tips to avoid jumping into dangerous and dubious asset classes. And while trading always holds a risk of loss, at least there is less of a risk in terms of deliberately bad or misleading information that has not been vetted by millions of knowledgeable traders worldwide.
How Blockchain Will Change Investing
Blockchain is, at its simplest, a data-storing solution. But in terms of financial securities, this technology is at the extreme end of financial innovation. At the end of last year, before the fast-track rise of cryptocurrencies, the Securities and Exchange Commission (SEC) gathered its experts and came up with statements regarding the potential of blockchain to alter the inner and outer workings of the investment community.
Here are some of the preliminary conclusions* of the SEC from the FinTech forum in the fall of 2016:
" To the extent there are real benefits to
participants in the financial services sector and their
customers, especially to back-office functionality, we
are considering whether this technology will obviate
certain services and participants or, rather, be adopted
into current infrastructures.
We also are looking closely at how innovators
will overcome challenges to the widespread adoption of
distributed ledger technology, such as interoperability
and scalability, and to what extent such systems will be
permissioned. Another important concern is how innovators
will address issues of cyber-security and the safety of
customer data and assets in a blockchain.
Significant excitement also surrounds the use
of securities-based crowdfunding, which we hope will
continue to fuel the development of a vibrant alternative
for small businesses to raise capital from retail
To recap, the blockchain approach may be used both for transactions in its own right, but also may replace the usual procedures for asset purchases, loans or other financial instruments. The SEC experts are still uncertain how the technology may be implemented. There is still a gap between the world of pure blockchain transactions with one type of cryptocoin, and moving to fiat currency positions or buying into international assets without border constraints.
It is still early to say if banks would switch to a distributed ledger, or as Condesk called it in its report, "a distributed source of truth". Currently, financial documents are centralized, and the "truth" is written in by dedicated, well-trained experts.
With a blockchain, the record-keeping and updating is embedded into the technology itself. And while hacking attacks may cause unwanted transactions, the record of value transfer cannot be doctored, removing the human factor of fraud, embezzlement or simple error.
And this is how investment bank Goldman Sachs has presented the blockchain technology to its clients:
" In its most basic form, the blockchain records ownership of bitcoin and transactions involving the crypto currency across a wide network of computers, as opposed to a centralized ledger. Transactions are signed off by the parties involved using the software, checked by the network or the “crowd,” then added to the blockchain — a long string of code that records all activity. Encryption in the software ensures these “blocks” cannot be tampered with or altered. And the decentralized nature means the “crowd” police the whole system. The software cuts out the need for a “trusted middleman” to sit in between parties in a transaction, such as a bank or clearinghouse. "
It is easy to see that even conservative, mainstream investors have now caught wind of the innovation and probably already think hard on the potential for gains both fast and long-term.
But investing may not be limited to the European Union and the USA, where general access to all asset classes is decent and there is a tradition of many forms of investment. The real excitement may come from areas previously untouched by the financial industry. The European periphery is just learning the ways of trading, and until recently Bitcoin was mostly in the domain of technies and true believers. Asia may post its own array of opportunities and challenges, and some countries may prove to be fast adopters, especially given the propensity for quickly embedding new technologies. So far, the Philipines are ahead of the game in cryptocoins popularity. And Asian trading hours are a most probable cause for the most recent spikes and sell-offs in several important cryptocurrencies.
Then there is the vast and still uncertain area of a new venue for raising capital for startups. Currently, Ethereum is the preferred platform and coin for software engineering startups, with a lively developer community and a fast transaction network.
Banks are forming a different alliance around the Ripple network and the XRP coin, mostly for the potential for fast international transactions. Santander, UniCredit, UBS, ReiseBank, CIBC, National Bank of Abu Dhabi (NBAD), and ATB Financial are all using the technology as of June 2017. " We’ve reached a tipping point where financial institutions are moving beyond blockchain experimentation and projects to real world applications that are driving significant bank-to-bank volume. ", said Ripple CEO Chris Larsen.
With some alliances and agreements forming, it is still early to say which cryptocoins will float or sink. Investors should be on the lookout for general enthusiasm, a flocking of minds and talents, an idea where a coin and a network are going. A good question to ask is what are the goods and services behind the coin. While Bitcoin serves as digital gold and for a long time had a shady reputation for illegal goods purchases, other coins may build various communities and generate a well-delineated source of innovation and wealth. Investors should also look at the potential liquidity as more exchanges or platforms adopt the currency. Ease of purchase and a well-visited trading platform are a must if a cryptocoin or a blockchain are going to grow in popularity.
Warnings and Protection: Some Pitfalls in Picking Cryptocoins
Cryptocoins come in many shapes and sizes. There are the big guns- Bitcoin, Ethereum, Dash and recently EOS joined the race. Then there is a slew of specialized coins that also raise their rates on a general rising trend. Meme coins may rely on a meme's popularity to gain attention. It is still early to say if DogeCoin has much to it except the cuteness. And then there are the thousands of new coin inventions, trading for fractions of the cent in fiat currency, and fluctuating wildly.
The last group of coins pose a really well known danger. In the recent past, pink sheet stocks did just what those newly built assets do now.
Here is one cautionary tale: with legalization of marijuana in the US about three years ago, pink sheet companies suddenly changed their business to medical cannabis. For many otherwise obscure tickers this meant a rush of new investors and a free promotion. Gains of 1,000% were the norm, not unlike the gains of a sub-penny stock pumped by promoters. But after the enthusiasm stopped, a lot of stocks suddenly wiped out the gains, losing up to 99%. While some companies were relatively solid, a lot of new additions managed to grab new investors' cash and lock it away.
Then there is the risk of exchanges disappearing altogether, or facing a liquidity challenge. Even a delay of a few days may be unnerving and lead to losses. While buying cryptocurrencies is relatively easy, selling may take a while and quoted prices may fluctuate quickly. It is best to keep in mind that cryptocoins fluctuate more wildly than traditional currency pairs. As stated at the beginning of the article, a social trading platform may be the best in terms of regulation, visibility and liquidity.
For buying and holding cryptocurrencies, the user should become comfortable with building and using wallets. Wallets are a way of secure storing and they range from online-hosted to desktop versions or just coded files with 2D barcodes which may be stored on paper and scanned with a phone or laptop camera. Storing funds on any online exchange means the funds are open to hackers, as several stealing events reveal. But personal electronic storage is also not risk-free, and there are stories of hard drives full of Bitcoins thrown away by mistake, or wallets without backup disappearing from a bricked smartphone. Always have a backup and know the procedure for withdrawing funds quickly.
Trusting technology and algorithms too far can also holds some long-term dangers. The blockchain approach to data storage is still innovative, with potential pitfalls, distrust, and the ever-present specters of transaction speeds and forks. Talk of improving the technology may be a boost to an asset price, problems and forks can chase away investors.
For newly invented coins and blockchains, there is always the possibility of foul play embedded in the very algorithm, with unclear rules. Fortunately, these events get cleared by the community and outright fraud rarely persists. The American Securities and Exchange Commission even warned of pyramid schemes related to cryptocurrencies.
And lastly, while a free decentralized network sounds well, the coins are not protected by a central bank. In case of freefall, there is no "too big to fail " clause, no central bank to provide liquidity and no bailouts with public money. Keep this well in mind, as even in the latest boom-bust cycle, governments rushed in to protect some asset classes and the market returned to normalcy. In cryptocoins, if a community or an idea loses, there is no one to save it from flouting- coins and bitchains sink or swim on their own merit.
Paradoxically, one of the risks for cryptocoins investors are the regulators. It is still unknown how far officials could go on to control or limit the market, but the SEC and also the European Central Bank have held talks, attempting to make sense of the innovation and propose some type of control. The European Central Bank in particular expressed worries that the spread of cryptocoins trading could affect fiat currency markets negatively. So far, the central bank has suggested the EU might want to curb the spread of digital currencies, as they may undermine the ECB control over the money supply, and thus disarm a major tool for economic and political stability in the euro area.
Investors should make sure to make a difference between limited and inflationary coins, and perhaps hold some of the more known currencies as value storage or a speculative asset. But it is still best not to invest if the loss cannot be easily afforded.