Since the cryptocurrency craze of 2017 raised the visibility of digital tokens with the wider audience, not only bitcoin aficionados have been pondering on how to start earning money from the craze. 2017 saw the price of Bitcoin rise to more than $17,000 per coin. Since then the price has moderated and the trend is less obvious. While the price is less prone to explosive growth, this does not mean the volatility subdued. This makes Bitcoin still a very attractive asset to trade in order to profit from the rapid price movements, as have greats such as George Soros recognized.
While many may be scared, or scarred after the price collapse from $17k to $6-7k we are seeing at the moment, other see opportunity. As mentioned, trading on volatility may not be the most obvious solution to many, but it does present a potentially good opportunity for many day traders. The nature of trading activity may also affect the type of platform and the type of the instrument favored. At times of general frenzy, when the only direction seemed to be higher price, general, wallet-type exchanges were the most obvious solution. You want to own an asset you believe will appreciate – its simple, buy it and hold it until the price rises as much as you are expecting it too, and then either sell or hold further.
These kinds of strategies are obviously a one-time thing as the price development in the previous year or so shows. Those who want to profit short term from Bitcoin today may need a different solution. Let’s review some of the drawbacks of the “buy and hold” approach. The first obvious one is the fact that cryptocurrency exchanges have not managed the inflow of new clients the best way possible. Delayed verification and delayed transactions have plagued their platforms which has in turn brought opportunity costs to many. Platform needs to be able to execute any given order immediately, otherwise trading does not make sense. At the same time, their fees have been much higher than with traditional payment services or other online brokers.
In this environment, betting on rapid price moves cannot be done efficiently enough. Not only that an individual trade can get locked in before the platform executes the order, but also, the whole balance suffers in case it is held in the cryptocurrency. Holding the balance in government money seems like a better solution since the value does not change as rapidly.
Another important feature for volatility traders is leverage. Trading at margin can be very lucrative, but it can also enlarge potential and realized losses. Idea is that the trader posts a margin, which works like a % deposit of each trade in order to insure the trade. If margin is 5%, this means that the maximum position can be 20x the margin. This is also known as 1:20 leverage. It allows trader to create larger positions than the balance on the account would allow. This also amplifies any move of the price, in both directions, making it also more dangerous in case of a price move that goes against the trader’s expectations. As long as traders understand this, most of them will look for a larger leverage to increase potential returns. Regular exchanges usually do not offer this feature, however, some more advanced trading platforms for bitcoin do – Bitmex or eToro are only some examples.
When one takes a deeper look, it’s easy to understand that its actually not necessary to ever even buy Bitcoin in order to profit from it. What is interesting is the price swing – and there are instruments available which offer much more risk management and control, which do not require owning Bitcoin, or any underlying asset outright. What these instruments offer is trading based on price, but settlement and depositing done in government money. We admit, this takes “crypto” out of trading cryptocurrencies, but one profits on the market not because one is blindly devoted to an idea, but by making smart decisions.
In this trading CFDs based on Bitcoin price (BTCUSD or BTCEUR currency pair) could be a smart move. The obvious advantages are the aforementioned balance which is held in government money which is not so much affected by daily value swings. Another benefit is the leverage – margin trading. One of the most important advantages of Bitcoin CFDs trading is the fact that the industry is well regulated and, especially in Europe, protections are put in place to safeguard traders. One of such protections is the negative balance protection which was recently made obligatory by the European Securities and Markets Authority.
Overall CFDs industry has seen more stringent regulations this year and cryptocurrency leverage has been limited to 1:2 by ESMA, which can seem like a bad deal to some traders, but considering the wild swings in tokens’ prices, it’s a reasonable number. Traders who still want regulated brokerage that offers higher Bitcoin trading leverage can also try trading with some ASIC (Australian Securities and Investment Commission) regulated brokers such as IC Markets. What is also good with IC Markets is that they also offer and ECN account, which will be interesting to traders who require high liquidity and lower spreads due to the volume they trade.
Overall, regulated CFDs brokers offer other protections which are still not implemented with conventional cryptocurrency exchanges. Security is one of the foremost issues in cryptocurrency trading today. CFDs brokers do not have issues with hacker attacks and the funds held with them are much more protected.
To conclude, the best cryptocurrency brokers will offer
– safety of the funds
– margin trading
– trading balance in fiat currency
– a license by a relevant authority
– low fees and spreads.