Until a few years ago, words such as blockchain, cryptocurrency, Bitcoin or Ethereum were familiar only to a relatively small circle of crypto enthusiasts. But the wild price surge of Bitcoin back in 2017 brought the attention of the whole world to this newly emerged asset class. Opinions on that subject in the finance and investment community polarized with many well-known industry figures taking both sides of the barricades. Some of the most famous investors such as Michael Novogratz, a former Fortress star hedge fund manager and partner at Goldman Sachs, totally embraced the new paradigm and went all-in into the wild world of the crypto trading. Others, like Jamie Dimon, for example, a CEO of JP Morgan bank, publicly called Bitcoin a fraud on a number of occasions.
While many people still argue about the value of Bitcoin and its potential ability to replace traditional fiat currencies, everyone will agree that cryptos now became an asset class on its own that helped many people to make a fortune in this newly created market. Of course, there were many unfortunate investors who invested at the pick of the market when the price for one Bitcoin was around $20,000. Then the price went down to around $4,000 and bounced back currently trading at around $8,000 level.
Such a massive increase in the Bitcoin price attracted millions of individual investors to participate in cryptocurrency trading, and that fact also significantly contributed to the Bitcoin price bubble. Another reason why Bitcoin became widely popular among individual investors is that cryptocurrencies are not yet regulated and it was very easy to start trading cryptos.
If, for example, you want to open a brokerage account and trade stocks, you will need to open an account with the traditional broker, make a substantial initial deposit like $10,000 and figure out how their trading system works. You need to closely follow the market, make sound investment decisions on a regular basis and if you make 10-15% p.a. returns you will be considered a very good investor. But no other asset class offered an opportunity to make hundreds of thousand per cent returns in a matter of days or weeks.
Many institutional investors were also attracted to the crypto market but for them, the main problem was regulatory as they could not engage in trading activities and comply with regulations. Later in 2018, companies like CBOE and other exchange introduced centrally cleared Bitcoin Futures but by the time these instruments were introduced, Bitcoin price was falling off the cliff and these instruments did not gain much in popularity.
While most of the traditional financial institutions and investors have not fully accepted cryptocurrencies as a stand-alone asset class, we have seen a large number of niche players that solely focus on cryptos entering the market. Crypto Hedge Funds, Crypto Brokers and Exchanges have emerged and taken this niche. Many professional traders and investors also followed suit and joined the developing cryptocurrency industry. But a lot of inexperienced people, as well as criminals, entered this space as well.
So in this article, we will try to explain what are the main ways to invest in cryptocurrencies now and what options are available for individual investors.
Ways to Invest in Cryptocurrencies
If you are thinking to start investing in cryptocurrencies, there are two main ways to start trading with each of them having its own advantages and disadvantages. So what are these options?
Cryptocurrency Exchanges
There is a large number of crypto exchanges available these days, each having its own features. The largest exchange by trading volume is Binance and the most popular among individual investors is Coinbase. Some crypto exchanges offer access to hundreds of digital tokens while others (like Coinbase) limit the number of digital coins to 10 -15 of the most popular ones.
Usually, crypto exchanges will have advanced trading platforms that were designed by experienced traders. You will be standard price charts and analytical tools and have access to all digital wallets. Some trading terminals would be quite modern, user-friendly and easy to use while others will still have that old-school look and might require some time to learn how to navigate.
Cryptocurrency exchanges offer a great opportunity to trade a large number of digital tokens, allow you to take long and short positions and some might even offer crypto derivatives. As crypto exchanges are not regulated and don’t have any requirements, it is very easy to set up an account, deposit funds and start to trade. But there is one major downside and risk which can’t be neglected.
Crypto exchanges hold clients’ Bitcoins and other altcoins in the digital wallets, all in one place. That makes crypto exchanges are the primary target for cyber-attacks and we have seen numerous occasions when crypto exchanges have been hacked and customers’ crypto assets were stolen. All the hackers have to do is to hack one exchange to have access to all clients’ accounts. Given the anonymous nature of Bitcoin and other cryptocurrencies, once tokens are stolen, it is almost impossible to trace them and recover.
While major crypto exchanges are constantly working on improving their security measures and spending millions of dollars on new technologies, the security risk is one of the major concerns for many individual investors who want to trade Bitcoin, Ethereum and other cryptos. But there is also a good alternative trading venue that allows you to fully benefit from the wide price volatility and not being exposed to the security risk.
CFD Brokers
CFD brokers have been very popular among individual investors for many years so it is not surprising that they have also been early adopters of cryptocurrency trading. CFD, or Contract for Difference, allows you to make bets on the price moves but without owning a whole underlying asset. Instead of buying the asset, you trade spreads or price difference. As you know don’t have to own an underlying asset and pay full price for it, you can start trading with a relatively small amount but still benefit from the full upside. Many CFD brokers will allow you to use leverage, especially when trading traditional markets, like stocks or forex, and you can take both short and long positions. Because the minimum investment required by many CFD brokers are quite low and they also don’t charge trading commissions, they became very popular with both beginner and experienced traders. CFD brokers provide you with professional trading terminals, give you access to hundreds of different markets with the ability to make leverage trades, support with training material and also allow social trading. The most popular CFD brokers are eToro, Plus500, CityIndex, Trade.com and Forex.com to name but few,
CFD brokers won’t hold clients’ digital asset but only fiat money. In many instances, they will be located in countries like Malta, Cyprus or the UK and will be regulated by the local financial authority. They will have to maintain adequate capital requirements, have proper risk management systems in place and in general provide a good trading venue for individual investors.
But there is one thing you need to be wary of when investing in cryptocurrencies with the CFD broker. Many new crypto specialist brokers that were established in the last year or two are not regulated and are located in off-shore jurisdictions. The fact that cryptocurrencies are not regulated, that is not necessarily bad and there are some very good unregulated crypto brokers. But as such brokers are holding your cash, you are essentially exposed to the broker risk. That is why it is extremely important to choose a reliable broker and read some reviews in order to determine if the company is trustworthy or not. We can recommend eToro, Plus500 or CityIndex as reliable brokers that are not only regulated in multiple jurisdictions.
Crypto exchanges and CFD brokers as main cryptocurrency trading venues, so what is the best way to trade digital assets?
Cryptocurrency Automated Trading
First, let’s explain the main difference between investing and trading.
Investing, it usually means taking a long-term view and having a long-term investment horizon. When you invest, you will usually expect an asset to appreciate in value and its price to go up. You must be ready to accept short-term price volatility or the fact that your investments may go down in value. The most famous investor of our times is Warren Buffet, who is known to be a value investor which means that he holds on to his investment for decades. The long-term performance of his investment company, Berkshire Hathaway is also one of the best of all times but there were times when the value of his portfolio was down 40% but he had patience and resources to wait to bounce back.
Traders, on the other side, have a short-term investment horizon and can take long positions to profit from price increase or short positions to profit from a price decrease. Traders also rely less on fundamental analysis and more on technical analysis, which means they spent most of their time analysing the charts and predicting price moves. Also, many day traders don’t hold their position overnight and aim to make as many small trades a day as possible. The goal is to make small profits but on a large number of trades, which can add up to a considerable amount over time.
Many day traders also use what is called automatic trading systems which is now also were made available to the crypto trading community. The computer algorithms are designed to open and close trading positions. Such an approach allows cryptocurrency trading on auto-pilot and you can trade the markets 24/7 without watching at your screen all the time.
Some of the crypto trading robots such as GunBot or Haasbot are installed as software on your computer and get connected to the supported crypto exchange. Other crypto robots such as Zignaly or Cryptohopper are offered as a cloud-based service where you can run your analysis and study price charts. Both these types are connected to cryptocurrency exchanges, allow you to place trades automatically and you can design your own or replicate existing trading strategies. There is also a third type of cryptocurrency robots such as Bitcoin Trader, Bitcoin Code, Ethereum Code, Bitcoin Loophole, Bitcoin Evolution, Bitcoin Revolution, Bitcoin Profit, Bitcoin Compass and others. Such robots are connected to CFD broker and run trading strategies that are also designed by the broker. These types of robots are particularly easy to use and very much suitable for beginner cryptocurrency traders. All it takes it to open an account and deposit funds with the CFD broker and adjust basic trading settings.
So what is your favourite way to trade and invest in cryptocurrencies? Please share your experience in the comments section below.
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