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5 Reasons Why Bitcoin Is Crashing Right Now
1. Market Manipulation
BTC market manipulation has been a highly contentious area that always arises when questioning Bitcoin’s price activity. Whether traders choose to accept it or not, evidence supplied by a University of Texas finance professor recently, along with investigations by the United States Justice Department the Commodity Futures Trading Commission, are beginning to prove that this ‘conspiracy theory’ actually exists in the market.
If you looked at Bitcoin’s chart this morning you would have seen that BTC was actually heading towards a bullish breakout from an ascending triangle pattern. Admittedly technical analysis is not a definitive tool for establishing price movements, but it does seem strange that BTC was able to climb out from the Bithumb hacked unscathed yesterday, show rising support through last night and then suddenly breakout bearish for no obvious reason.
Information presented in ‘Uncovering The Real Cartel In Bitcoin’ outlines the shady relationship between Tether and Bitfinex using evidence from the ‘Paradise Papers’, showing that USDT has been used to artificially inflate not just BTC markets, but other alt-coin trading pairs as well. Professor John Griffiths of the aforementioned University of Texas also wrote an extensive 66 page thesis recently highlighting this same suspicion. Though Tether has recently passed an independent audit which confirms that Tether has sufficient US dollar supplies to back each issued USDT token, some belief that this could have been achieved in a number of ways; including borrowing money to temporarily ‘window dress’ their bank accounts to artificially back their issued token supply at the time of the audit.
2. Market Supply Outweighs Current Demand
In a twitter post earlier today, Ronnie Moas touched on this issue in the current crypto market, that after the over-inflated Q4 surge last year crypto investors are beginning to lose faith that those figures will not be reached again.
“Supply hanging over the market like a dark cloud. Will be a challenge to blow that out”
Charlie Lee also commented on this lack of faith in a CNBC Fast Money interview yesterday, saying that the prices of Bitcoin , Litecoin and other alt-coins are ‘disjointed’ from the new developments that each project is rolling out this year. This is true, especially when you look at Tron and Vechain at the moment. Both projects have, or are about to, launch their mainnets and have both made significant partnerships with industry leaders, yet neither have experienced any notable rise in value. Instead, the market remains fixated on selling off and are afraid to HODL or invest against the falling market.
3. Market Maturity
Another reason to explain why Bitcoin is falling right now is market maturity. Despite Bitcoin being created back in 2009, the crypto market itself didn’t really start to gain traction until 2020/2020 when Ethereum , Dash and other early coin projects were starting to emerge from the wake of Bitcoin’s innovation. When crypto investing exploded late last year, the market was still in its infancy and largely speculative. Even now many projects are only just starting to release minimal viable products (MVPs), testnets, platforms etc off the back of their ICOs.
The premature surge of money in Q4 last year was never going to last for long and now we’re experiencing a harsh correction back to where the market should really be at this time in its development.
4. Mainstream Media FUD
Another crippling factor that always holds Bitcoin’s price back is bad press and the torrent of misguided information that is passed down to the general public.
As the traditional financial system comes under threat, mainstream media has played its role in misrepresenting the industry to potential new investors in this space, by downplaying its technological utility and over emphasizing bearish market movements. According to German Philosopher Arthur Schopenhauer though, all truths travel through 3 stages of acceptance,
(2) Violently Opposed
(3) Accepted As Self Evident
The crypto market here is no different. Right now the mainstream does not recognise the potential in this industry and is choosing to ignore it’s inevitable advance. Eventually however, it will become as widely accepted as mobile phones and the internet which also had to pass through those same 3 stages.
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5. National Regulatory Intervention
Regulatory opposition was always going to fight against the crypto market because it is an unregulated and decentralized financial system born into a centralized, heavily regulated world. In some ways regulatory intervention has proved beneficial in this space, like the self-regulated Japanese exchange association which aims at improving user security across exchanges, to better the nation’s crypto ecosystem.
In the US however, government institutions such as the Securities and Exchange Commission (SEC) and the New York State Department of Financial Services (NYDFS) have both smothered digital asset trading in regulations; imposing licensing and registration requirements on any crypto exchange or broker company wishing to operate in the US. This has led to a lot companies moving overseas and has restricted many US citizens from participating freely in the market.
5 Reasons Banks Can’t Buy Crypto — and The Solution Changing the Status Quo
Everyone and their mom is buying crypto these days.
Traditional investors are doing it. Individual consumers are doing it. Your grandma can even buy you a $100 worth of Ethereum as a Christmas gift with Ether cards!
But one kind of stakeholder has resisted entering the crypto space so far. We’re talking about banks. The trillions of dollars they control have been conspicuously absent from the $300+ billion crypto market cap so far. The majority of investors are retail and other non-risk averse funds who can invest into crypto without any problems.
The question is, why? Why are banks, who have the equity and the motivation to work with crypto, avoiding Bitcoin, Ethereum and other tokens?
This article gives 5 reasons why — and highlights a solution that’s slowly helping banks get exposure to crypto with their capital without taking on undue risk.
- Enforceable, auditable titled ownership
In the eyes of the law, crypto ownership is a grey area.
Both Bitcoin and Ethereum tokens are unregulated and anonymous. This means that checking who owns any given wallet is virtually impossible without some form of transaction analysis or data registration at an exchange or other information collection source. As a result, crypto assets are inherently semi-separated from their holders’ legal identities.
This raises a number of potential problems.
For example, say a bank owns Ethereum. If the funds are lost to an external attack or internal theft, the chances of recovering them are near impossible. There’s no proof of ownership, which means there are no records, which means the money’s gone into thin air.
That’s bad — and it’s just one of many scenarios where things can go wrong for crypto investors. At the end of the day, BTC and ETH aren’t issued or controlled by a real-life organization like a bank, a fund or a government. This means that even if we did assign titled ownership to tokens, enforcing that ownership would be impossible.
All of this makes crypto risky. Banks can’t justify this kind of risk to their risk-averse stakeholders. This is the first reason banks aren’t buying up Bitcoin and Ethereum; assets without verifiable, enforceable property rights scare institutional investors.
Of course, most tokens aren’t just untitled. They’re completely extralegal — which, as you’re about to find out, is another tangible problem for banks.
2. BTC is extra-legal
Bitcoin, Ethereum and most altcoins are “extra-legal” in the sense that they exist outside the world’s established legal and financial system. Put simply, Bitcoin and Ethereum tokens and addresses aren’t linked to real-life identities or accounts. They’re neither controlled nor issued by any particular organization, meaning they can be used with no regard for the law.
To crypto users, this is a positive. It means you — not your bank or the government — control your assets. It also means you can make discrete, instant purchases. And unless you leave a paper trail — for example, by buying crypto from your personal credit card — nobody has to know.
For banks, the reverse is true. Investing in an extralegal asset can put a bank at odds with the local or national government. It also makes it difficult to show the assets on a balance sheet, transfer ownership and — yes — justify the purchase to clients.
Of course, Bitcoin, Ethereum and most other tokens are extra-legal by design. This is the whole point and the reason they have so much value. This is “digital gold” that can’t be taken away by anyone else. The problem is that banks are supposed to be 100% law-compliant, which puts them at odds with this feature (even if only formally).
This extra-legality also means…
3. Exposure to Extreme Clearing Risks
Cryptocurrency trading is extralegal, which prevents traditional financial organizations from dealing in it.
At the same time, there’s clearly a lot of demand and supply for crypto. To bridge this gap, private-owned crypto exchanges like Coinbase and Localbitcoins process trades. This is an effective solution — but not one that appeals to banks. Here’s why.
The first problem is that exchanges aren’t a counterparty to your transactions. Instead, they’re a platform that facilitates peer-to-peer exchanges. This means that any potential trade has no inherent backing. Nobody is legally responsible for it.
This makes any crypto exchange a risky proposition. That’s the first clearing risk.
The second clearing risk is the volatile nature of crypto. As explained above, any trade done through an exchange is ultimately between you and another party. The risk is that you send your money to the exchange and in some part of the process, it disappears. This could be because of a server update, or a failed transaction or any number of other reasons.
The larger exchanges have good customer service and you will probably will get your funds back at some point. But what if the price of the asset you’re trading swings up or down during those 90 minutes? For example, what if you agree to sell your assets at $9,000/BTC — and meanwhile, the price goes up to $11,000/BTC?
That’s right. You stand to lose a lot of money to slippage if you have already bought the asset. This risk exists for all investors and financial assets, but with crypto, it makes clearing large amounts of money far more risky than banks are used to. When you’re dealing with 7, 8 and 9-figure sums, a fraction of a percent makes a tremendous difference.
The next problem on our list is that of…
4. Unclear Tax Implications
The tax status of cryptocurrencies is still unclear. In many cases, it appears outright contradictory. For example, exchanging BTC for ETH falls under IRC Section 1031 in the US. But if US Dollars are used to facilitate the exchange, the parties now have to report a capital gain or loss.
A little confusing, right?
Right — and we’re not the only ones who think so. Out of the hundreds of thousands of Coinbase users, only 500 actually included their crypto gains on their tax returns. The IRS, being a little confused itself, served Coinbase — one the largest crypto exchanges in the US — with a “John Doe” summons. They want to know more about anyone who had transacted more than $25,000 using crypto currencies, and so they could tax them.
The best-case scenario is that all ends well. Crypto assets get taxed like real estate, bonds or cash.
The worst-case scenario is that there’s never a clear way to report crypto for a long time to come. An equally undesirable scenario is that the extra-legal nature of Bitcoin, Ethereum et al will force states to create contradictory or complex laws that make life difficult for banks, as every jurisdiction will have varying restrictions, guidelines, and taxes.
Either way, there’s a fear that paying taxes on crypto will be difficult, confusing or outright impossible in the short run. This is yet another reason banks are loathe to get behind this new asset class.
But the single biggest reason banks are reluctant to invest in Bitcoin is also the one we saved for last.
5. Storage and security
There are 2 ways to store cryptocurrencies.
The first is called hot storage. In this case, hot doesn’t refer to temperature; it refers to your crypto wallet being connected to the internet. In other words, a hot wallet is defined by your ability to deposit and withdraw money at any moment.
Hot storage is vulnerable to all common digital threats — as well as a few specific to crypto. For example, a hacker could steal your personal passcode by intercepting your WiFi data, or getting access to your e-mail account. Alternatively, the exchange where you store your hot wallet could be compromised.
Either way, hot wallets aren’t particularly secure, which is why most long-term investors prefer cold storage, i.e. crypto wallets that aren’t connected to the internet. These can be hard disk-based, paper-based or, most recently, in the form of a USB stick like a Trezor or Ledger.
Cold storage is a lot more secure than hot storage. It can’t be hacked because it’s offline. However, it can be lost, damaged or physically stolen. Moreover, all cold storage starts out as hot storage before being disconnected from the internet, which means it’s still vulnerable — just for a smaller period of time.
This is the final reason banks can’t consider Bitcoin, Ethereum and other crypto assets seriously. Telling your clients that there’s no way to guarantee security is liable to get you laughed out of a boardroom meeting, or worse.
Now let’s recap by going over the 5 reasons banks can’t invest in Bitcoin:
- No clearly definable property rights
- Extra-legality of crypto
- Exposure to clearing risks
- Unclear tax implications
- Storage with limited security
Plainly speaking, crypto assets may be highly valuable to banks and their clients — but until they become available as real securities, banks can’t work with them.
The bad news is that the biggest bid to securitize the cryptocurrency in the US — the Winklevoss Bitcoin Fund proposal — was rejected by the SEC.
The good news is that a Europe-based team (called CyberTrust) has managed to create BTC, ETH and BCH derivatives called Crypto Global Notes. These are true securities that will eventually be traded on the Irish stock exchange. Because of this, they have clear tax implications, can be cleared risk-free, can be stored safely, and — most importantly — are 100% legal.
That leaves the problem of crypto security… Which CyberTrust addresses by storing their crypto tokens in the safest place in the world: a Swiss nuclear bunker managed by Xapo.
But the very best part? The Crypto Global Notes are redeemable, so if at any time you want to get your crypto assets back, you can.
All of these factors that, as of this moment, CyberTrust’s crypto securities are on their way to becoming the first crypto-derived security that banks can invest in without taking on risk or angering clients.
This means we’re seeing the first real move towards crypto assets banks can (and will) buy. If that sounds like something you’re interested in — whether as a speculative asset or a means to invest in securitized crypto — you’ll want to learn more about CyberTrust and their product by visiting their website.
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Let’s consider the following statement. If it’s true that the market can only go up or down over the long-term, then using the most basic 1:1 risk/reward ratio, there should be at least 50% winners, shouldn’t there? Well, there isn’t. This article debates in favour of the notion that a trader is their own worst enemy, and that human error is at the root of most problems. In short, the main reason why Forex traders lose money is no rocket science. It’s the traders themselves.
Financial trading, including the currency markets, requires long and detailed planning on multiple levels. Trading cannot commence without a trader’s understanding of the market basics, and an ongoing analysis of the ever changing market environment. For those interested in investing and trading, read through the suggestions below and you will learn how to avoid losing money in Forex trading.
Overtrading – either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalisation. We will skip unrealistic expectations for now, as that concept will be covered later in the article.
Most traders know that it takes money to make a return on their investment. One of Forex’s biggest advantages is the availability of highly leveraged accounts. This means that traders with limited starting capital can still achieve substantial profits (or indeed losses) by speculating on the price of financial assets.
Whether a substantial investment base is achieved through the means of high leverage or high initial investment is practically irrelevant, provided that a solid risk management strategy is in place. The key here is to ensure that the investment base is sufficient. Having a sufficient amount of money in a trading account improves a trader’s chances of long-term profitability significantly – and also lowers the psychological pressure that comes with trading.
As a result, traders risk smaller portions of the total investment per trade, while still accumulating reasonable profits. So, how much capital is enough? Here it is important to learn how to stop losing money in Forex trading due to improper account management. The minimum Forex trading volume any broker can offer is 0.01 lot.
This is also known as a micro lot and is equivalent to 1,000 units of the base currency that is being traded. Of course, a small trade size is not the only way to limit your risk. Beginners and experienced traders alike need to think carefully about the placement of stop-losses. As a general rule of thumb, beginner traders should risk no more than 1% of their capital per trade. For novice traders, trading with more capital than this increases the chances of making substantial losses.
Carefully balancing leverage whilst trading lower volumes is a good way to ensure that an account has enough capital for the long-term. For example, to place one micro lot trade for the USD/EUR currency pair, risking no more than 1% of total capital, would only require a $250 investment on an account with 1:400 leverage. However, trading with higher leverage also increases the amount of capital that can be lost within a trade. In this example, overtrading an account with 1:400 leverage by one micro lot quadruples potential losses, compared to the same trade being placed on an account with 1:100 leverage.
Trading addiction is another reason why Forex traders tend to lose money. They do something institutional traders never do: chase the price. Forex trading can bring a lot of excitement. With short-term trading intervals, and volatile currency pairs, the market can be fast paced and cause an influx of adrenaline. It can also cause a huge amount of stress if the market moves in an unanticipated direction.
To avoid this scenario, traders need to enter the markets with a clear exit strategy if things aren’t going their way. Chasing the price – which is effectively opening and closing trades with no plan – is the opposite of this approach, and can be more accurately described as gambling, rather than trading. Unlike what some traders would like to believe, they have no control or influence over the market at all. On certain occasions, there will be limits to how much can be drawn from the market.
When these situations arise, smart traders will recognise that some moves are not worth taking, and that the risks associated with a particular trade are too high. This is the time to exit trading for the day and keep the account balance intact. The market will still be here tomorrow, and new trading opportunities may arise.
The sooner a trader starts seeing patience as a strength rather than a weakness, the closer they are to realising a higher percentage of winning trades. As paradoxical as it may seem, refusing to enter the market can sometimes be the best way to be profitable as a Forex trader.
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Not Adapting to the Market Conditions
Assuming that one proven trading strategy is going to be enough to produce endless winning trades is another reason why Forex traders lose money. Markets are not static. If they were, trading them would have been impossible. Because the markets are ever-changing, a trader has to develop an ability to track down these changes and adapt to any situation that may occur.
The good news is that these market changes present not only new risks, but also new trading opportunities. A skilful trader values changes, instead of fearing them. Among other things, a trader needs to familiarise themselves with tracking average volatility following financial news releases, and being able to distinguish a trending market from a ranging market.
Market volatility can have a major impact on trading performance. Traders should know that market volatility can spread across hours, days, months, and even years. Many trading strategies can be considered volatility dependent, with many producing less effective results in periods of unpredictability. So a trader must always make sure that the strategy they use is consistent with the volatility that exists in the present market conditions.
Financial news releases are also important to keep track of, even if a selected strategy is not based on fundamentals. Monetary policy decisions, such as a change in interest rates, or even surprising economic data concerning unemployment or consumer confidence can shift market sentiment within the trading community.
As the market reacts to these events, there’s an inevitable impact on supply and demand for respective currencies. Lastly, the inability to distinguish trending markets from ranging markets, often results in traders applying the wrong trading tools at the wrong time.
Poor Risk Management
Improper risk management is a major reason why Forex traders tend to lose money quickly. It’s not by chance that trading platforms are equipped with automatic take-profit and stop-loss mechanisms. Mastering them will significantly improve a trader’s chances for success. Traders not only need to know that these mechanisms exist, but also how to implement them properly in accordance with the market volatility levels predicted for the period, and for the duration of a trade.
Keep in mind that a ‘stop-loss to low’ could liquidate what could have otherwise been a profitable position. At the same time, a ‘take-profit to high’ might not be reached due to a lack of volatility. Paying attention to risk/reward ratios is also an important part of good risk management.
What is the Risk Return Ratio?
The Risk/Reward Ratio (or Risk Return Ratio/ RR) is simply a set measurement to help traders plan how much profit will be made should a trade progress as anticipated, or how much will be lost in case it doesn’t. Consider this example. If your ‘take-profit’ is set at 100 pips and your stop-loss is at 50 pips, the risk/reward ratio is 2:1. This also means that you will break-even at least every one out of three trades, providing that they are profitable. Traders should always check these two variables in tandem to ensure they fit with profit goals.
The best way to avoid risks completely in Forex trading is to use a risk-free demo trading account. With a demo account you can trade without putting your capital at risk, while still using the latest real-time trading information and analysis. It’s the best place for traders to learn how to trade, and for advanced traders to practice their new strategies. To open your FREE demo trading account, click the banner below!
Not Having or Not Following a Trading Plan
How else do Forex traders lose money? Well, a poor attitude and a failure to prepare for current market conditions certainly plays a part. It’s highly recommended to treat financial trading as a form of business, simply because it is. Any serious business project needs a business plan. Similarly, a serious trader needs to invest time and effort into developing a thorough trading strategy. As a bare minimum, a trading plan needs to consider optimum entry and exit points for trades, risk/reward ratios, along with money management rules.
There are two kinds of traders that come to the Forex market. The first are renegades from the stock market and other financial markets. They move to Forex in search of better trading conditions, or just to diversify their investments. The second are first-time retail traders that have never traded in any financial markets before. Quite understandably, the first group tends to experience far more success in Forex trading because of their past experiences.
They know the answers to the questions posed by novices, such as ‘why do Forex traders fail?’ and ‘why do all traders fail?’. Experienced traders usually have realistic expectations when it comes to profits. This mindset means that they refrain from chasing the price and bending the trading rules of their particular strategy – both of which are rarely advantageous. Having realistic expectations also relieves some of the psychological pressure that comes with trading. Some inexperienced traders can get lost in their emotions during a losing trade, which leads to a spiral of poor decisions.
It’s important for first-time traders to remember that Forex is not a means to get rich quickly. As with any business or professional career, there will be good periods, and there will be bad periods, along with risk and loss. By minimising the market exposure per trade, a trader can have peace of mind that one losing trade should not compromise their overall performance over the long-term.
Make sure to understand that patience and consistency are your best allies. Traders don’t need to make a small fortune with one or two big trades. This simply reinforces bad trading habits, and can lead to substantial losses over time. Achieving positive compound results with smaller trades over many months and years is the best option.
There we have it, the main reasons why Forex traders fail and lose money, along with the steps traders need to take in order to prevent them from occurring. Studying hard, researching and adapting to the markets, preparing thorough trading plans, and, ultimately, managing capital correctly can lead to profitability. Follow these steps and your chances for consistent success in trading will improve dramatically!
Furthemore, to increase those chances even further, you should consider upgrading your MetaTrader trading platform with the ultimate enhancement – MetaTrader Supreme Edition! This free plugin offered by Admiral Markets enables you to boost your trading experience by adding excellent features such as the regular technical analysis updates provided by Trading Central, global opinion widgets, FREE real-time news, and so much more!
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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
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