Rance Masheck is President and Founder of iVest+, a next generation stock and options trading platform.
When I teach people about investing, one of the things I try to get across is there is no rush to get involved in new markets. It seems like every few years, there is always a hot new thing that lures people in. Whether it is futures, forex, single-stock futures, contracts for differences (CFDs) or now cryptocurrencies, all of these investment vehicles have markets that take time to mature. But not all markets are created equally or in equal time, and cryptocurrencies appear to have reached maturation at this point — and seemingly faster than most of their predecessors. (Full disclosure: Author holds investments in cryptocurrency.)
Consider futures. Futures have been around in the U.S. since the Chicago Board of Trade formed in 1848. However, it has really only been in the past 20 or so years that an average investor might dabble in futures contracts. What did it take for that to happen in the futures market? First, the contracts had to become liquid — and most of them are — so that investors have the confidence they can get in and out. Contract sizes also make a difference. The E-mini S&P 500 (ES) is the most commonly traded futures contract, but there are full-size contracts, minis and now even micros. This lowers the barrier to entry for smaller traders to get involved.
Forex has also been around for a long time, but even as recently as the 1980s, forex trading was restricted to large banks and financial institutions. It wasn’t until the internet age in the 1990s and beyond that forex trading became accessible to everyone. Even then, it took until the 2000s for people to have confidence in the liquidity levels and rules of the markets to make it actively traded.
There are also markets that don’t seem to quite get the traction others do. CFDs were gaining popularity for a while, but when stock trading commissions dropped to zero in the U.S., the CFD brokers lost their momentum. Single-stock futures is another category that sounded interesting out of the gate. With extra leverage and the ability to short the contracts without having to physically borrow shares of the stock, these contracts seemed like a strong idea when they came out in 2002. However, it’s a safe bet that most people haven’t even looked at one.
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Cryptocurrencies, led by the rise of Bitcoin, is one of the latest new markets. While there is certainly a lot of speculation in cryptos at this point, and there could be some regulation to come yet down the road, cryptos in general have moved out of the “new market” phase and are settling into the “mature market” category. Bitcoin itself now has a valuation over $1 trillion.
Cryptocurrency brokers are offering more and more tools that people can use to analyze cryptos for trading purposes. Downtime is minimal. There are a variety of ways to store your cryptocurrencies, from hot wallets (software-based wallets that must be connected to the internet to access your funds) to cold wallets (hardware-based wallets like USB keys that store your funds safely and must be plugged in to use).
Some brokers, such as Robinhood, offer crypto trading but not futures or forex, showing how quickly this market has jumped to the head of the pack. It is just a matter of time before platforms offer the ability to store your cryptocurrencies and trade them alongside stocks, options, futures and more.
Speculators come and go and take their chances in many markets on many opportunities. Long-term investors are often late to the game, but they don’t take chances on a market not being ready and stable. At this point, it seems likely cryptocurrencies are here to stay, becoming mainstream with platforms safely providing customers with ways to engage in this market. I can always look back and wish I owned a bunch of Bitcoin at significantly lower levels, but I can also look forward now to see there are dozens of cryptocurrencies liquid enough to trade, and that’s more exciting for the future.
This is part one in a three-part series on cryptocurrency trading. Part two will look at why and how cryptocurrency trading made such a fast rise.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.