Cryptocurrencies have hit the headlines in recent years. The stratospheric rise of bitcoin in 2017, followed by a sharp price correction in 2018, has prompted many people to pay closer attention to the murky world of altcoins.
There was a time when the only people who used bitcoin were hackers and criminals operating on the Dark Web. Today, bitcoin and other altcoins such as Ethereum and Litecoin have entered the mainstream. Anyone can buy and sell bitcoin via online exchanges. All you need to do is open an account and use a credit card or debit card as payment. Increasing numbers of businesses and retailers also accept bitcoin as a payment option.
Investing in Bitcoin
The upward trajectory and increasing acceptance of bitcoin as a mainstream currency make it an attractive investment option. Many forex brokers now offer bitcoin trading. You can trade bitcoin against several well-known currencies, including USD, GBP, and EUR. It is easy to speculate on the price of bitcoin without actually owning any. Open long or short positions and profit when bitcoin moves in the right direction. But how does bitcoin trading with CFDs via a regulated broker compare to buying/selling on a cryptocurrency exchange?
What is Bitcoin CFD Trading?
CFDs are contracts for difference. You are speculating on the price of a financial instrument (in this instance, bitcoin) at some point in the future. You don’t actually own the underlying asset. If you speculate the price of bitcoin will rise, you make an agreement with the broker to that effect. If you are correct, the broker pays you the difference between the current price and its future value. If you get it wrong, you must cover the loss.
Trading with a regulated broker lets you take advantage of leverage. Forex traders use leverage to maximize their profits. They can trade with far more capital than they actually have in their trading account. Leverages of 50:1, 100:1, and 200:1 are the norm in regular forex trading. This means with a 100:1 leverage, you can buy 100,000 units with only $1,000 in a trading account.
The leverages offered on cryptocurrency CFDs are a lot less. For example, EU regulated brokers typically offer a maximum leverage of 5:1. You can’t use leverage when you buy or sell cryptocurrency in most crypto-exchange.
Managing Risk with Stop Losses
Of course, it is worth pointing out that while leverage can significantly boost your profits, it will also amplify your losses. Fortunately, when trading bitcoin CFDs via a regulated broker, you can use stop losses and other tools to manage your exposure to risk. Given how volatile the cryptocurrency markets can be, this is a sensible precaution to take.
Trading via a regulated broker is ideal if you are interested in day trading. The spreads are lower when trading bitcoin CFDs. Crypto-exchanges are more suitable if you plan on buying bitcoin and exchanging it for fiat currency at a later date.
CFD trading has its advantages, but always do a risk assessment before you embark on any kind of trading activity.