In the previous post, I started the discussion on trading bitcoin, I gave out a background to trading bitcoin, I do hope you found it helpful. If you haven’t read that post yet, you can read it here.
In this post, I will discuss the three basic ways bitcoin and other crypto-assets could be traded. This guide is not only applicable to bitcoin but to other cryptocurrencies as well. There are some key terms that will try and explain in parenthesis.
How to Trade Bitcoin
There are three ways Bitcoin and other crypto-assets can be traded, check them out below:
- 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
This option, which is to buy the underlying, you become the direct holder of the digital asset.
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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 the 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. First, we will go over the positive sides of owning the underlying digital asset.
For long-term investors who are willing to actively safeguard their Bitcoin, owning the underlying is clearly the way to go, but prudent steps must be taken to mitigate the risk of Bitcoin theft and/or loss of private keys (i.e., diversifying holdings across wallet/storage types, using two-factor authentication and strong passphrases).
Trading Bitcoin as a CFD/Derivative: Pros and Cons
CFDs or contracts for difference is a financial instrument that allows trader to participate in various markets that aren’t normally as flexible as the Forex market, but allows them to replicate that kind of leverage and granularity.
For more read here
Active traders looking to speculate on Bitcoin over the short or medium term may find that trading CFD/derivatives on Bitcoin using an online forex broker will provide them with 24hour trading, potentially lower margin, and the ability to go either long or short. Because of counter-party risk, choosing a broker is just as important as finding one with the best trading tools or commission rates.
Buying Bitcoin-Related Securities (ETFs, ETPs, etc.)
What is a Security?
A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
To read more check here
For stock market investors, investing in Bitcoin indirectly through a listed security such as an ETF, ETP, or trust may be suitable for those looking at taking a passive position. Active traders might find the limited trading hours and potential lack of volume a limiting factor that could hinder their trading. Overall, using listed securities that invest, track, or hold Bitcoin can be a viable alternative to diversify away from the risks of margin trading or safeguarding private keys when buying the underlying.
I hope that you have gained some insights into how the coin market works. I will suggest you study more and do personal research before you commence on trading.
See you in our next post. Do share, comment and come back for more.