From trading below $4,000 on January 1, 2019, to reaching a value of just below $14,000 on June 26, 2019, Bitcoin has had a good year so far. Many industry experts predict that the coin will reach a price of $20,000 by the year end, surpassing its meteoric rise of late December 2017. It still remains the largest cryptocurrency in terms of price and market capitalisation. As of July 23, 2019, BTC accounted for 65.2% of the total crypto market cap of $273 billion.
Market news has been positive for Bitcoin, with experts predicting a bullish trend overall. Based on technical indicators, experts believe that the coin is mimicking its behaviour from 2013 to 2017. It is poised to reach new all-time highs, which means that this could be good time to trade the largest cryptocurrency out there.
But, how does one start to trade Bitcoin? Should it be done on cryptocurrency exchanges or through Contracts for Difference (CFDs)? Let’s look at both the options.
A large percentage of crypto enthusiasts trade on exchanges, where deposits have to be made in fiat money into an exchange wallet, which is then exchanged for Bitcoins. However, there are also many crypto exchanges that don’t accept fiat money, in which case, deposits have to be made in BTC. This is a big hurdle for first time traders. There are other points to consider too, such as:
But the greatest drawback of trading cryptocurrencies on exchanges is the security aspect. Crypto assets are maintained in exchange wallets, which are prone to theft and hacking. According to a report by CoinDesk, 2018 was a record year for exchange hacks, with over $2.7 million worth of cryptos being stolen each day. More and more exchanges are now paying attention to introducing 2-factor authentication protocols and strict norms for client verification. But exchanges tend to centralise the risk and it is vital to remember that an increase in sophisticated security tech doesn’t necessarily mean that hacking methods won’t evolve too.
The cryptocurrency markets are highly volatile, which means that when traders decide to buy and hold coins for a longer period, the valuations at the end of the day could be way lower than what they had bought the coins for. Transaction delays, due to lack of scalability in these exchanges is not the only issue, many exchanges report fake trading volumes. In September 2018, trader and analyst Alex Kruger exposed $250 million worth of fake trading volumes on the Korean crypto exchange, Bithumb.
A viable and safer alternative to trading Bitcoins is through Contracts for Difference (CFDs), where traders speculate on the price movements of cryptocurrencies (the underlying asset), without actually owning them. This negates the chances of losing money due to exchange hacks and theft.
Apart from eliminating security risks, transactions become easier through reputed CFD brokers, who offer robust trade management systems for trade operations. To trade CFDs, traders need to open a margin account with the broker, where they can deposit the trading capital in fiat money. In return, they gain wider exposure to the cryptocurrency market through leveraged or margin trading.
Leveraged CFD trading allows traders to enter positions that are much larger than what they could with their own capital alone. However, the amount of leverage needs to be chosen responsibly, given that leveraged trading magnifies both gains and losses. The good news is that regulated brokers do not offer irresponsible leverage ratios for a highly volatile instrument like Bitcoin. For most jurisdictions, the maximum leverage offered for crypto CFDs is 2:1.
Most cryptocurrency exchanges do not provide the option of leveraged trading, except Bitmex and Kraken, where it is available only for a few select crypto pairs.
CFDs should also be traded with appropriate risk management tools, like stop-loss and take-profit, which are extremely important in high volatility conditions. By creating a stop-loss order, traders are able to determine a price level at which all positions should be closed, so that losses can be cut short. Take-profit levels allow traders to lock-in a certain amount of profit, before the price of the underlying asset declines.
Not only can traders invest in different cryptocurrencies, they can also trade in both bullish and bearish markets with CFDs. In case a trader takes a long position, and the prices rise subsequently, they make a profit. In case the markets decline, they can take a short position and decide to close the position when the markets recover. Unlike other derivatives, like options and futures, CFDs do not have standard expiry dates.
Routing trades through a CFD broker assures proper technological and customer support. Traders can access comprehensive guidance on how to set up accounts, as well as educational resources and prompt replies to their questions on trading Bitcoin. This is in sharp contrast to cryptocurrency exchanges, most of which do not have reliable customer service facilities. Traders have to wait for long times for technical queries, KYC formalities and withdrawal or deposit of funds.
Unless you want to buy small amounts of Bitcoin and hold them for the long term, CFD trading could be a safer way to trade cryptos. Unless the coin hits rock bottom, the chances of losing all of your money is lower with CFDs. But exchange hacks happen randomly, which is the greatest disadvantage of storing coins in digital wallets.
CFDs offer lower spreads and absolute security in trading. However, it is important to ensure proper risk management and market analysis to make informed trading decisions.