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Hidden pitfalls for professional crypto traders: an overview

Fri, 01/31/2020 - 05:00

Professional crypto traders can analyze the market and precisely predict all the upcoming movements. But besides the situation on the market there are some factors that can also influence the cryptocurrency prices. Read this article to be aware of them.

Over-the-counter trading

People often think professional traders have a pretty sweet deal. And while they do tend to get more favorable terms and even VIP treatment, it’s not all plain sailing. If you only trade small, you probably don’t have any experience outside of the big crypto exchanges. Well, beyond the shiny, welcoming webpages promising “instant transactions at the best rates” there lies a disorderly grey mass of brokerages, hedge funds, high-wealth individuals and other assorted “whales” comprising what is known as the Over-the-Counter (OTC) market – the place you go when you need to move serious volumes.

And here, things work very differently to Binance or Coinbase. Most of the time, a bid or offer is posted in an instant messenger group for a prospective buyer or seller to see and accept. Despite the seemingly haphazard way of doing things, the OTC market’s turnover is huge. For instance, researchers from Digital Assets Research and TABB Group found out that it handled $250 million to $30 billion in trades per day in April 2018. By contrast, the exchanges processed about $15 billion in daily trades over this same period.

But if the system is so disorganized, exclusive and error-prone, then why is it so popular? The answer to that lies in the extremely low cost of doing business over-the-counter compared to via an exchange. Back in late October of this year, Whale Alerts posted about a transfer of 9,013 coins ($83M) made for a fee of just $1.64. This came just a short time after Beincrypto reported an 18,00 BTC transfer which cost just $3.55 to complete. As you can see, these eye-watering sums changed hands at less than many retail investors pay for a sub-$1000 transaction. Until now, this was a good way to exchange large amounts of crypto without affecting the underlying asset price. But with the rise of automated OTC exchanges, this could all change.

Back in late October of this year, Whale Alerts posted about a transfer of 9,013 coins ($83M) made for a fee of just $1.64

Pump and dump syndicates

These online communities often consist of gullible sheep looking to get rich quick with a handful of lupine puppet masters pulling the strings behind the scenes. They frequently take the form of online chatrooms, Telegram channels or Discord chats with posts promising members an “easy 300% return” on their investment if they just follow the group’s buy and sell signals. Unfortunately, though, the market usually collapses before the price target is reached, leaving the poor investors holding a pile of now worthless altcoins.

But it isn’t just retail investors that get burned by pump and dump schemes, professionals can also fall victim, often with even more disastrous results. After all, your risk is amplified significantly when you’re turning over bigger volumes. The fact that many of these systems seem to make perfect sense on paper makes them particularly tempting, especially when you see ads on social media showing a 17 year old with his brand new Lambo. Just remember: “if it’s too good to be true, it probably is”.

Hard forks

Whenever a major coin announces a hard fork, a measure of volatility inevitably ensues. We saw it with Bitcoin Cash back in 2017 and Bitcoin Private a year later. Luckily, they are usually publicized in advance, giving holders of the parent coin ample time to prepare for the subsequent instability. A good rule is to avoid trading around the time of the fork: wait for the dust to settle and then decide what to do.

A case-in-point is Ethereum’s Istanbul hard fork, which met with a mixed response after going live last week. Following the launch, China’s Centre for Information and Industry Development (CCID) promoted Ether to second place in its Global Public Blockchain Technology Assessment Index, but critics have claimed that the update still leaves Ethereum a way off its goal of becoming the “world computer”. As a result, the coin has actually declined around 20%.

Protocol vulnerabilities

It is a common misconception that digital currencies are immune to hacker attacks, but as is usually the case: where there’s a will there’s a way. A short time after the boom of 2017/2018, several big exchanges came under fire. The two most notable cases were Coinbase and Gate.io, which appeared to have been targeted by the same actor. And as the number of exchanges, brokers and network updates continues to grow, we can only expect to see more and more security breaches.

For example, only a couple of months ago serious security vulnerabilities were discovered on the Bitcoin Lightning Network, which could result in users losing their funds if nodes are not upgraded. This came just as Ethereum (ETH) decentralized exchange protocol AirSwap’s developers announced that they had found a critical vulnerability in the system’s new smart contract system. And even more recently, Dragonfly Capital’s Ivan Bogatyy reported a security flaw in Litecoin‘s new Mimblewimble protocol.

The key takeaway from this is that even the most well-established and supposedly secure networks are not completely unhackable and investors would be wise to take their own precautions to secure their coins and data. Aside from using cold storage systems, there’s no sure fire way to protect your crypto from would-be thieves. However – if you do opt for the convenience of a hot wallet – be sure to use a trusted platform such as StormGain.

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