Bitcoin took the world by storm in the last five years. Breaking down every barrier doubter out in its way, it has risen to be one of the most significant technological advancements of our generation. It’s also safe to say it’s one of the most profitable technological advancements of our age.
With numerous people trooping in to get their slice of the market, the crypto trading world has risen to unexpected heights. There are now multiple ways to make money by trading cryptocurrencies like Bitcoin, but that brings up the question: Which way is the best? Well, stick around while we find the answer.
Trading With The Actual Cryptocurrency
This is what most people know as “trading.” As the name implies, you trade one commodity for another in the hope of making a profit. In this case, it could be trading crypto-to-crypto of crypto-to-fiat.
The main principle behind this form of trading involves buying a lot of cryptocurrency for little money and selling small cryptocurrency in the future for a lot of money. While this sounds deceptively easy, there is a lot of technical knowledge involved in it.
- You have full control and ownership of the underlying currency.
- There are more trade options available to you. You can transfer, sell, exchange, or convert the funds as you see fit.
- Your assets can be safely secured in your crypto wallet or the e-wallet of the cryptocurrency exchange platform.
- There is a broader range of options when it comes to storing or transferring your assets.
- Safeguarding your Private Key is your responsibility.
- Technical knowledge and an understanding of the market is required to trade profitably.
- Losing your private key may mean losing your entire assets.
- If your private key is stored on the cryptocurrency exchange platform where you bought the Bitcoin, it could be remotely hacked, and all your Bitcoin could be stolen from the exchange platform.
- Third-party wallets can be hacked, and all your Bitcoin could be stolen.
- If you keep the private key offline only (cold storage) and lose your private key and cannot recover it, your Bitcoin is lost forever.
- You must remember your password or private key if you store your Bitcoin on an e-wallet.
Trading Bitcoin as a CFD/Derivative
Derivatives are a great way to trade with Bitcoin if you do not have any Bitcoin or access to Bitcoin. You can trade using what are called CFD’s. A CFD means a Contract For Difference. When trading using this method, you don’t sell your coin, but actually, bet on the price of Bitcoin falling using what is called a derivative. Whether or not you make a profit depends on the way the price goes. A good strategy would be to hold your coin, hoping the price will rise, but bet the price will fall using a CFD. This is a great way to mitigate your losses because you make some profit no matter which way the price goes.
- Trading a CFD or derivative on Bitcoin spares you the responsibility of safeguarding your private keys.
- It typically offers a higher degree of leverage. This leveraging increases your buying power and potential profit (and loss too).
- Brokers typically offer lower transaction fees, although the spreads may be slightly wider.
- Spreads are usually wider when compared to other trading methods.
- Trades may be canceled or reversed if the broker finds faults in the system or if you default on any part of your agreement with the broker.
- Clients rely entirely on the creditworthiness of online brokers.
- Margin trading means there is a chance of a negative balance occurring in colossal market volatility.
- If the broker declares bankruptcy, investors may suffer substantial losses.
Buying Bitcoin-Related Securities
An Exchange Traded Fund (ETF) is a fund or security used to track the prices of the underlying assets, in this case, Bitcoin. With an Exchange Traded Fund, it is possible to establish custody over the tracked assets, followed by the issuance of shares that confirm ownership over such assets.
Their rise in popularity owes much to their perceived selling and buying potential and the substantial liquidity they offer. For an investor intending to purchase the underlying asset of an ETF, they often represent a more accessible option compared to trading the assets themselves.
Exchange-Traded Products (ETPs) represent a type of security that is priced derivatively. It trades intraday on a national securities exchange. ETPs are passive investments, which sets it apart from ETFs. Yet, investment tools such as commodities, currencies, share prices, or interest rates can be parts of an ETP. These funds can operate like actively managed funds, including ETFs.
- Trading Bitcoin-related security aims either to replicate the performance of the asset.
- Doesn’t require safeguarding private keys
- Trades as a publicly listed security on the exchange under exchange guidelines.
- Due to several technical features inherent in the system, the price of a security and the price of the underlying asset (Bitcoin) may vary.
- The security may only be tradeable during exchange hours and not 24 hours a day.
- It is somewhat more illiquid than other trading methods because the traded security volume may be less than the available quantity of the underlying asset.
- Spreads and other fees may be different than the cost of buying the underlying directly.
- Some users want direct control over their assets.
- Investors would have little or no say in deciding on the future development of the governance and consensus mechanisms behind their assets.
Bitcoin trading is a great way to make some cash off the crypto market. Remember always to play smart. Don’t get wrapped up in greed and take unnecessary risks. The inherent volatility of the Bitcoin market is a great way to make a profit, but that also means you can quickly lose money if you don’t take your time to get an in-depth understanding of the market. All trading carries some form of risk, so trade responsibly.