Why isn't cryptocurrency trading a scam?

Many have heard the saying that 95% of traders end up losing money while a mere 5% find success. This kind of statistic can be quite daunting and can make one skeptical about diving into cryptocurrency trading.

Today, we'll break down the actual odds of making a profit from cryptocurrency trading and see how it stacks up against other more dubious ventures.

Many equate cryptocurrency trading with the unpredictability of gambling and even with some outright scams. Common comparisons include:

● Sports betting outlets;

● Casinos;

● Binary options.

But such comparisons don't really hold water, both mathematically and technically speaking. Trading cryptocurrencies has its unique set of dynamics, influenced by factors like the nature of the platform (whether it's a centralized or decentralized exchange) and the strategies of the trader.

Let’s delve into these activities:

Characteristics of sports betting:

● Chances of winning: Roughly 45%. Consider a tennis match where two evenly matched players have odds of 1.9 each. If you bet on both, the loss will invariably be more than the possible gain;

● How do these agencies profit? Mostly from users' losses;

● Can you manage the risks? Not really. You're essentially risking the entire amount you bet. This makes establishing any kind of robust risk management strategy a tall order. Over time, the scales tend to tip towards more losses than gains.

However, by leveraging detailed sports analytics, understanding team dynamics, player forms, and other relevant factors, one can increase their success rate. While seasoned punters may spend years analyzing such data to up their game, remember: they're essentially up against the house, leaving their investments exposed to third-party factors.

Let's use the classic game of roulette, often considered the emblem of brick-and-mortar casinos, as an example:

● Odds of winning: Slightly under 49%. Given that a roulette wheel has 16 slots each for black and red but also includes the green slot (number 0), the house always has a slight edge;

● How do casinos keep the lights on? Mostly from the money players lose;

● Can players manage risks? Hardly.

Trying to game the system in a casino is a losing battle. Regardless of how deep your analysis goes or how many statistics you've crunched, roulette outcomes are, at their core, left to chance.

Binary options represent a type of dubious activity where individuals bet on financial asset prices. Participants aim to predict whether an asset's value will rise or fall compared to its opening value within a specific timeframe, often up to 10 minutes:

● Winning odds: 40%. The average profit on a successful bet is 80%. However, if the prediction is wrong, the loss is 100%.

● Company's revenue source: users' funds.

● Risk management: unavailable.

Though some draw parallels between binary options and traditional trading due to the graphical similarities, the two differ significantly. Transactions in binary options don't appear on exchanges or in order books. They're just bets hosted on a platform, overseen by third parties. Furthermore, many countries have prohibited binary options, leaving them largely unregulated. A significant number of these platforms operate from offshore jurisdictions.

Cryptocurrency trading primarily differs from stock market trading in the assets involved and their volatility. However, the foundational characteristics remain similar:

● Winning odds: 50%. Given that an asset's price either ascends or descends, without thorough market analysis, the success rate is typically a coin flip.

● Revenue source for exchanges: transaction fees. It's of little concern to cryptocurrency exchanges whether a trader profits or incurs losses. Their interest lies in the volume and number of transactions, which can generate substantial fees.

● Risk management: available. Traders have the flexibility to set varied risk levels, hedge their positions, utilize leverage, opt for exchanges offering higher liquidity, and consider both micro and macroeconomic data. These strategies can enhance the chances of securing profitable transactions.

A trader's profitability hinges largely on their ability to analyze the market. This typically involves two primary types of analysis: technical and fundamental.

Technical analysis involves studying charts to identify patterns and market conditions that have occurred in the past. Essentially, traders seek past market conditions to predict future price behavior. Key attributes of technical analysis include identifying the overall trend, trading volumes, support and resistance levels, candlestick patterns, and concepts like Smart Money, among others. All of these elements can enhance the probability of profitable trading in the long term.

Fundamental analysis provides a broader context of news related to cryptocurrencies and identifies specific events that influence the price of an asset. Examples include coin unlocking, using coins to purchase goods or services, the number of network participants, and so on.

To illustrate why mathematically profitable trading is feasible, consider a basic trading strategy with a Risk/Reward (R/R) ratio of 3.0. With an R/R of 3.0, a trader risks one unit of an asset to potentially earn three. For instance, if the risk on a position is 1%, and after six trades, three are profitable and three are at a loss, the total loss would be 3%, while the profit would be 9%. Thus, over the long haul, a trader's income will grow based on the number of trades executed.

Although it's entirely possible to earn profits from cryptocurrency trading from a mathematical perspective, many users lose money due to a lack of discipline and not adhering to a trading plan. For successful trading, it's crucial to develop a robust trading strategy and continually refine it, learning from past mistakes.