Today crypto currencies (Buy Crypto) have become a global phenomenon known to most people. While still somehow geeky and not understood by most people, banks, governments and many companies are aware of its importance.
A crypto currency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Crypto currencies use decentralized control as opposed to centralized digital currency and central banking systems.
The decentralized control of each cryptocurrency works through distributed ledger technology, typically a block chain that serves as a public financial transaction database
Bitcoin is a cryptocurrency, a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries.
Litecoin is a peer-to-peer cryptocurrency and open-source software project released under the MIT/X11 license. Creation and transfer of coins is based on an open source cryptographic protocol and is not managed by any central authority. Litecoin was an early bitcoin spinoff or altcoin, starting in October 2011
Ethereum is an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality. It supports a modified version of Nakamoto consensus via transaction-based state transitions.
Trading Bitcoin Contracts for Difference (CFDs)
Trading Bitcoin Contracts for Difference (CFDs) Futures are a special type of investment asset that allow you to invest in various commodities. From gold to cattle, and everything in between, futures expand the field of available investment opportunities to pretty much any commodity of value. Futures are essential for setting global prices on important commodities, such as oil, and support complex global markets, such as markets for agricultural goods.
When you purchase an Ethereum or Bitcoin future, you are basically signing a contract to purchase something at a later date, at a specific price. So if you buy for example an Ethereum future for 1,000 Ethereum token, you are actually buying a contract for the delivery of 1,000 Ethereum token, once the contract comes due.
Most traders, however, sell their futures contract before it comes due and the tokens are delivered. One way traders can avoid having to physically accept delivery of a commodity is through a “Contract for Difference.” In this case, the buyer and seller agree to pay any difference as prices rise or fall in cash, instead of through the delivery of physical goods.
How to Trade Bitcoin
Below are the three ways you can trade Bitcoin:
- Buy the underlying from an exchange or online cryptocurrency broker (holding the actual currency in a wallet at the exchange or off-site)
- Trade (buy/sell) a CFD (Contract for Difference) derivative and hold cash margin with an online forex broker or multi-asset broker.
- Buy a publicly listed security related to Bitcoin and hold shares with an online stockbroker.
Buying the Underlying (Actual) Asset: Pros and Cons
Taking the first option listed above, which is to buy the underlying, you become the direct holder of the digital asset. Upon purchase, the cryptocurrency is sent to your bitcoin address or account (wallet) with the exchange. From there, you can transfer the cryptocurrency to any bitcoin address or wallet address using your private key that verifies you control ownership of the asset.
This responsibility to safeguard your private key which controls the digital asset also comes with some additional risks, as explained below.
Trading Bitcoin as a CFD/Derivative: Pros and Cons
- Trading a CFD or derivative on Bitcoin negates the responsibility to safeguard any private keys.
- Greater degree of leverage is usually offered on derivatives, so your cash margin can have more buying power (increased risk/reward).
- CFD/derivatives permit shorting by opening a selling position without first having a long (buy) position, for those looking to speculate on a decline in prices of the underlying.
- Brokers may be able to offer lower transaction fees, although spreads may be slightly wider or marked up, depending on the liquidity sources the brokerage uses.
- Spreads (trading cost) are usually wider compared to trading the underlying.
- Trades may be cancelled or reversed in the event the broker finds fault in its systems (price, etc.) or if it finds a client violates their particular account agreement with the said broker (agreements vary).
- Clients rely on the creditworthiness of the online broker for managing any risk prudently and ensuring that it is well capitalized (less risk of going defunct).
- Margin trading means there is a chance of a negative balance occurring in the case of huge market volatility, a gap, or other Black Swan systemic event.
- In such cases, counterparty risk falls on the broker, which means if the broker declares bankruptcy, investors may suffer substantial losses and not receive priority among creditors.
Buying Bitcoin-Related Securities (ETFs, ETPs, etc.): Pros and Cons
- Trading a Bitcoin-related security that aims either to replicate the performance of the asset or act as a trust that holds Bitcoins where investors don’t need to hold private keys provides traders an alternative investment vehicle to buy and hold (long only).
- Doesn’t require safeguarding private keys
- Trades as a publicly listed security on exchange under exchange guidelines.
- The price of the security and the price of the underlying asset (Bitcoin) may vary, causing a tracking error, either due to fees or other differences in the portfolio construction methodology.
- The security may only be tradable during exchange hours, and not 24 hours a day as is the case with Bitcoin.
- Volume of the traded security may be less than the available volume of the underlying asset (making it illiquid).
- Bid/ask spreads and other fees may be different than the cost of buying the underlying directly.