How Do Crypto Strategies Differ from Traditional Markets?

Crypto markets differ significantly from traditional markets in terms of structure, accessibility, and risk.

Unlike traditional exchanges with set hours, crypto operates 24/7, which leads to constant price movements and unique challenges for traders.

To succeed, crypto traders must adjust their strategies to account for extreme volatility, diverse time zones, and decentralized market dynamics that introduce higher risks and opportunities.

Let’s go through them.

Key Takeaways – Crypto Strategies vs. Traditional Market Strategies

• 24/7 Trading
  • Crypto markets never close.
  • This requires traders to adapt to constant price movements and opportunities around the clock, unlike traditional markets with clear market hours.
• Higher Volatility
  • Crypto’s extreme price swings may accordingly entail smaller position sizes and strict risk management compared to traditional assets.
  • Crypto is dominanted by smaller individual traders, who tend to be more momentum-driven relative to the common types of institutions that dominate the price action of traditional asset classes.
• Leverage Risks
  • Crypto exchanges offer higher leverage, which can result in rapid liquidations and increased market risk.
• Technical Adjustments
  • Adapted indicators (e.g., RSI thresholds for overbought/oversold) may be needed for crypto’s fast-moving dynamics.
• Unique Fundamental Analysis
  • Crypto requires different valuation models.
  • Focus is often on network effects, token supply, and blockchain metrics.

Market Hours and Accessibility

Traditional markets operate on strict schedules, typically 9:30 AM to 4:00 PM Eastern Time for the New York Stock Exchange.

Conversely, crypto is always going (with some exceptions).

This 24/7/365 availability creates unique challenges and opportunities for traders.

You might wake up to find your positions have moved significantly overnight, or be active in markets while traditional traders are asleep.

The nonstop nature of crypto markets demands different risk management approaches as it pertains to volatility and position sizing.

Geographic Considerations

Traditional markets are heavily influenced by their home countries’ trading hours.

The Tokyo Stock Exchange, London Stock Exchange, and NYSE all have their peak liquidity during their respective time zones’ business hours.

Crypto blurs these lines completely.

Some patterns in crypto emerge around time zones, and the global, decentralized nature of cryptocurrency means volume and volatility can spike anytime, anywhere.

Size of Crypto vs. the Size of Stock and Bond Markets

The crypto market is dwarfed by the stock and bond markets. 

Global stock markets are valued at over $100 trillion, while the bond market exceeds $140 trillion. 

In comparison, the entire cryptocurrency market cap currently hovers in the low single-digit trillions, making it a relatively small player in the global financial landscape.

For example, the size of some single stocks – e.g., Apple – alone is larger than the entire size of the crypto markets.

This means that the crypto market is dominated by smaller traders.

Crypto as an asset class generally doesn’t fit the characteristics of what a pension fund, central bank, sovereign wealth fund, endowment fund (among others) would look for in an asset or in alternative stores of value.

Volatility and Risk Management

Price Swings and Position Sizing

Crypto’s notorious volatility commonly dwarfs traditional markets.

Though more common the past, bitcoin can easily move 5-10%+ in a day, while a 1%+ move in the S&P 500 makes headlines.

This extreme volatility necessitates different position sizing strategies.

Traders often use much smaller position sizes in crypto – what might be a reasonable 5% portfolio allocation in to a certain stock could introduce unacceptable swings (to a lot of traders) in crypto.

Many successful crypto traders never risk more than 1% of their portfolio on a single trade.

Leverage and Liquidation Risks

Both markets offer leverage, but crypto exchanges often provide extreme levels – up to 100x or more.

This attracts gamblers and can lead to cascading liquidations when prices move sharply.

Traditional markets have strict margin requirements and circuit breakers to prevent meltdowns.

Crypto is less developed with such guardrails.

A single large liquidation can trigger a domino effect, wiping out leveraged positions across the market.

Examples:

• Terra-LUNA collapse (May 2022)
• Three Arrows Capital (3AC) liquidation (June 2022)
• FTX implosion (November 2022)

Technical Analysis Adaptations

Timeframe Considerations

Technical analysis in traditional markets often focuses on daily, weekly, or monthly charts.

Crypto traders frequently analyze much shorter timeframes.

The 4-hour chart is popular in crypto, offering a sweet spot between noise and significant price action.

Even 5-minute charts can be useful for short-term trades, though they’re generally too noisy for traditional securities.

Indicator Adjustments

Common indicators need tweaking for crypto markets.

Moving averages might use shorter periods – a 200-day moving average could be less relevant when a coin has only existed for a limited number of years.

The Relative Strength Index (RSI) often needs different overbought/oversold thresholds.

The RSI’s traditional 70/30 levels might be too conservative in crypto’s volatile environment.

Assets can remain “overbought” for extended periods during strong trends, so such thresholds may not be very good for spotting reversal candidates.

Fundamental Analysis Differences

Valuation Metrics

Traditional markets rely heavily on established valuation metrics like P/E ratios, dividend yields, and cash flow analysis.

Crypto requires entirely different frameworks.

Network effects, daily active addresses, developer activity, and token economics replace traditional metrics.

You can’t value bitcoin using discounted cash flow analysis – it generates no cash flow.

Instead, metrics like hash rate, mining difficulty, and on-chain analytics help traders understand network health and adoption.

Due Diligence Challenges

Traditional investors can read audited financial statements and analyze decades of company history.

Crypto projects often have short track records, anonymous teams, and complex tokenomics that require technical understanding to evaluate.

Due diligence might involve:

• reading code on GitHub
• participating in Discord communities
• analyzing token distribution schedules

Market Maturity and Historical Data

Traditional markets have decades, even centuries, of historical data, which allows analysts to build models based on long-term performance trends and cycles.

In contrast, many crypto assets are relatively new, with limited historical data.

This makes it harder to apply traditional long-term forecasting models in crypto markets.

Instead, traders often rely on shorter-term metrics and evolving data sources.

Regulatory Environment

Traditional markets are heavily regulated, with strict reporting requirements for public companies.

This provides analysts with reliable, standardized data to use in their evaluations.

In the crypto space, regulation is inconsistent and varies greatly across jurisdictions, meaning that many crypto projects operate without standardized financial disclosures.

Tradeers have to independently gather information from sources like whitepapers, community updates, and on-chain data.

These often lack the credibility of traditional market filings.

Utility and Adoption

In traditional markets, assets such as stocks derive value from the underlying company’s ability to generate profit.

Crypto assets, on the other hand, often derive value from their utility within a network.

For example, the value of ethereum comes from its use in smart contracts and decentralized applications (dApps), not from cash flows or dividends.

Understanding the real-world use cases and the level of adoption in the ecosystem is important for evaluating a crypto asset’s potential.

Token Inflation and Supply Dynamics

Traditional stocks have a more or less fixed number of shares (buybacks and issuance occur in some situations).

But in the crypto world, the supply of many tokens is dynamic and a bigger part of the picture.

Some tokens have capped supplies (e.g., bitcoin), while others, like ethereum, may have ongoing inflation.

Capped supply is instituted in some projects believing it will help its value in the long run.

The counterargument is that new and better forms of crypto assets can come up, which means supply capping doesn’t necessarily mean value retention.

It’s analogous to how not being able to build homes any more in a certain area doesn’t mean that this will necessarily support home values there if people simply move elsewhere or demand homes elsewhere.

Evaluating supply mechanisms – e.g., token burns, staking rewards, mining incentives – is important in understanding how supply and demand will impact the future price of a crypto asset.

Community and Governance

In traditional markets, shareholder meetings and board decisions drive company governance.

In contrast, crypto projects often rely on decentralized governance models, where token holders vote on key issues.

The strength and engagement of a crypto project’s community, as well as its governance framework, are important in determining the project’s long-term success.

Regulatory and Compliance Considerations

Trading Restrictions

Traditional markets have clear regulations about insider trading, market manipulation, and disclosure requirements.

Crypto operates in a regulatory gray area.

Some jurisdictions have implemented crypto-specific regulations, but many aspects remain unregulated or unclear.

Some aspects are hard to enforce, so traders are largely operating in the Wild West.

This regulatory uncertainty creates both opportunities and risks for traders.

But this is also an issue in regular markets as well. Markets are adjudicated based on buying and selling in a free market, not in a courtroom.

Tax Implications

Traditional investments have well-established tax treatments.

Crypto introduces complexities like hard forks, airdrops, and DeFi yields that tax authorities are still grappling with.

Traders must keep meticulous records of all transactions, including crypto-to-crypto trades that might be taxable events.

The burden of compliance often falls heavily on the individual in crypto markets.

Market Manipulation Awareness

Pump and Dump Schemes

Pump and dump schemes remain common in crypto, especially for smaller tokens.

Groups coordinate buying activity to drive up prices before dumping on unsuspecting investors.

The lack of regulation and the ease of creating new tokens make these schemes more prevalent.

Traders must remain vigilant and understand the signs of artificial price movement.

Whale Watching

Large holders, known as “whales,” can have outsized impacts on crypto prices.

Their wallet addresses are often public, which allows traders to monitor their activities.

When a whale moves tokens to an exchange, it might signal incoming selling pressure.

This level of transparency is unheard of in traditional markets, where large traders can more easily disguise their intentions.

Wash Trading

Wash trading occurs when traders buy and sell the same asset to create artificial trading volume.

This tactic makes a coin or token appear more popular than it is, luring other traders in.

It’s often used on smaller exchanges with less oversight.

Look for signs of unusual trading activity that doesn’t align with organic market behavior.

Spoofing and Fake Orders

In spoofing, manipulators place large fake buy or sell orders to create the illusion of demand or supply.

These orders are then canceled before execution, tricking other traders into reacting.

This can influence prices temporarily, and uninformed traders might fall victim to these misleading signals.

Short and Long Squeezes

Manipulators with substantial capital can initiate short or long squeezes by creating rapid price movements that force traders in leveraged positions to close their trades.

In a short squeeze, the price is driven up quickly, forcing short sellers to buy back at a loss, further boosting prices.

A long squeeze happens when prices drop sharply, forcing long positions to sell, exacerbating the decline.

These tactics are often used to exploit overleveraged traders.

Technology-Specific Strategies

Network Congestion Considerations

Crypto traders have to account for blockchain-specific factors.

Network congestion can lead to high transaction fees and delayed order execution.

During market volatility, some networks become practically unusable due to high fees.

The more sophisticated traders often maintain accounts on multiple exchanges and hold some assets on different blockchains to be sure they can act when opportunities come up.

The idea of having multiple brokers is also something traders in traditional markets do as well in case their account at one isn’t accessible.

Smart Contract Risks

DeFi trading introduces unique risks absent from traditional markets.

Smart contract bugs can lead to lost funds.

Flash loan attacks can temporarily distort prices.

Traders have to understand the technical risks of the protocols they use.

Moreover, they may need to know how to read and verify smart contract code, which is a skill unnecessary in traditional finance.

Conclusion

Crypto trading requires a mindset shift from traditional markets.

The technical skills, risk management approaches, and analytical frameworks all need adaptation.

While some principles carry over, the unique characteristics of crypto markets demand specialized strategies and considerations.

Successful traders in traditional markets can’t simply copy-paste their approach to crypto – they have to evolve and adapt to this newer, dynamic environment.

Some differences may diminish as the crypto market matures – e.g., bitcoin is more stable than it used to be – but its fundamental nature as a decentralized, global, 24/7 market ensures it will always require unique approaches and strategies.