You remember the adage about not putting all your eggs in one basket? If the basket falls, you are likely to end up with a lot of broken eggs and nothing for lunch. The same thing applies to currencies, but in reverse.
In traditional trading, those operating in currency markets call their portfolios ‘baskets’. These baskets can contain a range of national monies – euro, pound, zloty, lev – rather than just take a punt on one.
This helps them to spread the risk of their trading strategy. You would probably not put all your money on a single stock in a universe of thousands. If the company was to go under, you might lose the lot.
With currencies, which are a lot more volatile than stocks, a trader can easily double their money or be wiped out in a day, should there be some news that moves markets.
How does this relate to crypto? The premise is the same, but while traditional, paper currencies around the world move up and down depending on national monetary policy and the performance of their country or region’s economy, the drivers of cryptos are different.
Cryptocurrencies are a highly volatile unregulated investment product. No EU investor protection. Your capital is at risk.
As they are not meant to be tied to any of the above, cryptos move on different factors – confidence being a key driver. This is something important to consider if you are buying crypto as an investment rather than to use to buy goods and services.
There are few clear, individual drivers for each cryptocurrency, the correlation – or when currencies all move in the same way – is relatively high, compared to traditional markets.
Does this mean you can just buy one crypto? Not so fast. Even if they have the same drivers to their movements, there are still big differences. Some are much bigger than others, some are tied to specific creators and others are simply unique, which means they may react differently to a slump or a surge.
INVEST IN CRYPTOS NOW
Cryptocurrencies are a highly volatile unregulated investment product. No EU investor protection. Your capital is at risk.
Equally, we have seen some cryptos be hit with legal scandals or technical outages, which have impacted their value compared to others, while endorsements can move them the other way.
Importantly, studies show that as digital currencies gain maturity and each gain their own following and character, the correlation has begun to recede, meaning they have begun acting less like each other.
Should this trend continue – and history in traditional markets indicates that it might – it will be vitally important for investors to have a wide spread of cryptocurrencies to spread the risk.
Take a look at your own basket – it might be time to mix up your cryptos and choose some fresh eggs.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework. Your capital is at risk