Cryptocurrency trading is a new area for most people but is one of the few financial markets where the barrier to entry is not too high. Minimum trades start at around $5, allowing anyone to use popular platforms like Coinbase or Bittrex. Many brokers are now offering cryptocurrency trading alongside more traditional assets, which has opened up access with just an internet connection. However, along with this new level of access also comes a new level of risk.
Cryptocurrencies are incredibly volatile and can swing in value by double-digit percentages in one day. Many people see trading cryptocurrencies the same way they see trading stocks, but there are some significant differences.
You Need to Do Research Before Starting to Trade with Cryptocurrencies
One of the most important things that someone will need before starting cryptocurrency trading is research. Cryptocurrencies are complicated assets with many factors to consider when trading them. Volume, market cap, coin value, and trading history are all pieces of information that need to be analyzed. A trader won’t effectively judge whether investing in a particular digital currency is worth it or not without doing their due diligence first. The most successful cryptocurrency traders are also the best informed regarding the ‘spread’.
What is the Spread, and How Do You Calculate It?
One key factor you must consider with cryptocurrencies, especially ones with low market caps, is what you might call ‘spread’. The spread is the difference between the buy and sell prices, and it can be a substantial amount when dealing with low-priced digital currencies.
Spread can be utilized by traders to maximize their profits (or minimize their losses). If a trader believes that the spread will widen, they may sell the asset now and repurchase it at a lower price later. Conversely, if a trader believes that the spread will narrow, they may choose to buy the asset now and sell it later at a higher price.
For example, when writing this article, Bitcoin Cash (BCH) was trading at $1,584.62 on CoinMarketCap. If you wanted to buy one BCH, you would need to spend $1,584.62. However, if you wanted to sell one BCH, you would only receive $1,584.61 in return. This means that the spread for BCH is 1%.
While this may not seem like a lot, it can quickly add up if you are frequently trading. Over 24 hours, the spread for BCH would equate to $5.33.
How Does a Spread Affect Your Trade?
This is because of the volatility of cryptocurrencies. Prices can change rapidly, which means that the spread widens or narrows quite dramatically. Therefore, the spread is not only affected by the current market conditions but also by the liquidity of the asset.
Spread on cryptocurrency is not fixed. It can change throughout the day or even within a single trading session. Low-priced cryptocurrencies usually have much higher spreads than more expensive ones, but they have the advantage of being highly volatile. This means that they can provide greater profits (or losses) in a short space of time.
On average, the spread for cryptocurrencies is between 1-2%. This is far higher than the 0.01% you might expect to see with other financial assets, but it is not as high as the 5-6% that you might see with forex assets.
Should the Spread be Your Only Focus?
The important thing for traders to remember is that the spread should not be the only consideration when trading cryptocurrencies. Volatility, liquidity, and market conditions must also be taken into account. If a cryptocurrency has a large spread but is also very volatile and illiquid, it might not be a good idea to trade with it. However, it could be an ideal trading asset if the cryptocurrency has a small spread and is highly liquid and doesn’t change too much in price.
Some people prefer not to worry about calculating the spread when trading and want something simple and easy. Others enjoy looking into everything in detail and enjoying the thrill of outsmarting other traders. It all comes down to your personal preference. You can always open a demo account at Saxo Bank and practice your strategies before making real money investments.
