Why Low Spreads Matter When Trading Cryptocurrencies?
Bill Gates has previously stated that he intends to short Bitcoin. Shorting, often known as selling, is the act of profiting from asset price declines. It’s a well-known term that originated in traditional finance. Before 2018, the crypto market lacked sufficient routes for traders to profit on declining Bitcoin (and, by extension, crypto asset) values. By the end of the year, Bitcoin had dropped from roughly $20,000 to $3,200.
Because cryptocurrencies are inherently unstable least for the time being—it is simple to benefit from them in various ways other than purchasing and holding. Traders who are looking for a quick profit frequently “short” Bitcoin and other digital assets. They sell high—possibly with leverage—and buy low—that is, started positions are closed at the market value, higher than the published chart price, resulting in large profits.
Trading derivatives is one of the simplest ways to sell Bitcoin and has several advantages regarding price speculation. These are unique crypto products that monitor the price of the actual asset, allowing traders to purchase and sell the asset without really owning it. Given how risky and unstable the crypto scene is, this is a huge relief for traders who would prefer to profit from the asset’s fluctuation without having to worry about keeping the digital asset safe.
Why Trade Crypto Derivatives?
Because of the nature of the derivatives market, some traders can place sell orders even if they don’t hold the cryptocurrency. It’s a significant benefit, and it’s much more convenient because traders merely issue orders to benefit from price movements rather than holding, as is the case on crypto spot exchanges.
As a result, traders can benefit regardless of the current trend. Traders will buy when markets are heading higher and sell when markets are going lower. Given the turbulence of the crypto market, this opens nearly limitless trade opportunities every day of the week, irrespective of strategy.
Additionally, some platforms employ an index compiled from the top ten largest cryptocurrency exchanges to provide traders with the best available pricing. As a result, traders can go long or short on the most popular crypto pairs, such as BTC/USD.
Furthermore, their usage of the MT5 platform, which is well-known among new Forex traders, makes things even simpler. Aside from its ease of use, the platform is jam-packed with important trading tools for technical analysis.
Some platforms, on the other hand, publish professional opinions on the most popular crypto pairs and daily news updates that are important for fundamental research. Even so, there are charges that a trader should be aware of before entering the market. Brokers charge different overnight costs, commission fees for each trade, and spread on trades. A crypto trader must consider spreads and commission costs and any other charges because they directly impact profitability. Spreads are significant since they are levied every time a trade is opened.
What is the Spread in Crypto Trading?
A spread is the gap in pips between the BID and ASK price quotes (buy/sell) in a currency pair such as the EUR/USD in the forex market. Many brokers use a spread to reward themselves for each transaction their customers make through their bitcoin exchanges. This is the most basic explanation of a spread: When the EUR/USD is valued at 1.1500; the broker will offer it to purchase or sell for 1.1501. The bid and ask prices and the symbols that make up the currency pair are used to calculate the trading price of any currency pair.
How does the Spread Work?
Consider the following scenario: Trader X intends to start a EUR/USD buy position for 1.2001. The broker instantly confirms the order, most likely at 1.1999, resulting in a one-pip profit on the transaction. Now, trader X wants to sell at 1.2010 to finish the purchasing position, but the broker will probably process the order at 1.2011 to earn another pip on the completion.
In the example above, the trader is charged a fee for each execution from each trade on the forex market. To capitalise on each trade, the anticipation from each trade should be more than the spread amount. The spread cost varies by currency pair, and the trader must account for these variables to get more money than the real spread cost.
Know Your Spread
In the forex market, understanding the spread is crucial. The spread is the fee that the broker collects for each trade, and it affects whether or not that fee is acceptable for your trading style.
Second, all investors and traders should be aware of the absence of information concerning the likelihood of altering spreads on their trading systems without their clients’ agreement. Some unethical brokers use this tactic to increase their profits on occasion. As a result, the trader must choose a reputable crypto broker maintaining low spreads. It’s also a good idea to trade with a broker regulated by a regulatory authority because their regulator has strong criteria for financial services and products, such as the security of clients’ cash in isolated accounts.
Let us return to the relevance of the spread as it symbolises the cost to the trader, even if you work with brokers who do not engage in any manipulation. A trader who uses modest spreads will have lower operational costs and save money in the long run. As a result, a trader with a widespread will need to make more money to cover the expense. The spread is quite crucial to many traders when it comes to their losses and winnings. A big spread, for example, can consume most of a trader’s earnings if they make a lot of short-term (scalper) deals. The spread is of minimal importance to a long-term trader (swing) whose trades yield a particular number of pips in profit because it has little influence on the trading performance.