The growth of Bitcoin and other crypto currencies over the last several years has resulted in many investors wanting to know how to trade Bitcoins and other crypto currencies. Even though there were only a very few exchanges to buy and sell crypto currencies a few years back, the story is entirely different today. There are thousands of exchanges to trade crypto currencies to an extent it has become a difficult decision to decide on which exchange to trade, and to filter out the genuine exchanges from possible scams. In this article, we will take a look at how to trade crypto currencies.
There are primarily two ways to trade crypto currencies.
- Buy and sell crypto currencies through an online broker/exchange
- Buy and sell crypto currencies through a CFD (Contracts for Difference) broker
Trading crypto currencies through an online broker/exchange
Trading crypto currencies through an online broker or an exchange is the most popular option to trade crypto currencies at present. There are many online brokers to choose from, and many of these brokers are registered with the relevant regulatory authorities and are licensed to facilitate crypto currency transactions.
There are three types of exchanges available.
- Trading platforms that connect buyers and sellers and charge a fee for every transaction executed on the platform.
- Direct trading platforms that facilitate person-to-person trading of crypto currencies. The fees should be discussed and agreed upon by the two parties involved in the transaction.
- Brokering platforms that enable buyers and sellers to trade crypto currencies with the broker for a fixed price set by the broker. These platforms essentially act as market-makers.
When selecting an exchange to trade Bitcoins and other crypto currencies, traders need to pay attention to a few important aspects.
- Reputation of the crypto currency exchange
- Fees charged for trading crypto currencies
- Deposit and withdrawal methods supported by the exchange
- Identity verification requirements
- The applicable exchange rate to convert your local currency to U.S. dollars or other supported currencies by the exchange
- Geographical restrictions
- Regulated status of the exchange
All these factors need to be considered before signing up for a crypto currency exchange as there are numerous instances in which traders ended up being on the wrong side of the bargain. In addition, there have been a series of incidents where traders got scammed for their money and ended up being the victims of fraudulent trading platforms.
The regulatory status of the crypto currency exchange needs to be assessed thoroughly as well. Even though many platforms advertise of their regulatory approval by well-known financial institutions such as the Securities Exchange Commission of United States or the Financial Conduct Authority based in London, many of these exchanges in fact are not registered with these regulatory authorities.
Below list comprises of the most popular crypto currency exchanges available for investors today.
All these crypto currency exchanges have obtained the relevant regulatory approval to operate as an exchange to facilitate crypto currency transactions, and trader should at all times consider partnering with these licensed service providers to minimize the risk of dealing with a fraudulent operator which can lead to massive loss of capital invested.
A screenshot of the Coinbase exchange
(Image courtesy of Coinbase.com)
If an investor is using an exchange to trade crypto currencies, the best option would be to sign up for a crypto currency wallet as a wallet is needed to secure these digital coins. Most of the exchanges listed above provide their own crypto currency wallets for which any investor and trader can sign up for.
While all these wallets are online wallets, there are several types of wallets to choose from.
(Source – Cointelegraph)
Trading crypto currencies through an exchange is the most convenient, reliable, and popular way of trading these digital assets, and investors who are keen on gaining exposure to crypto currencies should consider the use of a regulated exchange to do so.
Trading crypto currencies through CFDs
CFDs, or Contracts for Difference, have gained popularity among the investing community in the recent past, driven by the ability to trade using a significant portion of margin. While the idea behind this article is not to give an intro on how CFDs work, it’s important to note that CFDs carry a significant risk as these trading instruments are structured in a way that a trader would be able to trade for a significantly higher amount than the invested amount, which is referred to as equity.
The very high leverage ratios used in trading CFDs could magnify profits and of course losses, which might result in a wipe-off the capital invested within the span of a few minutes. Crypto currencies are already volatile by nature, and the use of CFDs magnifies the degree of volatility associated with crypto currencies. However, seasoned traders have used CFDs time and time again to benefit from this volatility, and there are several licensed CFD providers in the world.
Below is a list of renowned, regulated CFD providers that offer crypto currency trading.
All these CFD providers have obtained the regulatory approval to operate in hundreds of countries across the world, but the first step would be to ensure your country is included in this list. This could be easily done by visiting the official website of these CFD providers.
What are the main concepts every crypto currency trader should know?
Crypto currencies are intrinsically different from any other traditional asset class such as equities, bonds, and real estates. As such, a special emphasis should be placed on a few different characteristics of crypto currencies before deciding to trade these digital assets.
- Crypto currencies are very volatile, which makes it difficult to use the tried and tested trading techniques used by millions of investors around the world to trade stocks, bonds, and commodities. The very volatile nature of crypto currencies could wipe off millions of dollars within a matter of a few minutes.
- Crypto currency trading is not regulated by any government agency. This means that investors would be solely responsible for all their actions, and there would not be any third-party to monitor the safety of these investments. For example, many government agencies provide insurance to a certain level for funds kept in bank accounts and other financial institutions. However, this is not applicable for crypto currencies, which is something every novice crypto currency trader should be aware of.
- There is information asymmetry at play when it comes to crypto currencies. There are parties with significant insider knowledge of what is happening with Bitcoin and other crypto currencies, whereas the general public has very little information as such. This makes it difficult to predict the price movements of crypto currencies with any degree of precision, and many traders rely on technical analysis and speculation to gauge the direction of future price movements.
Crypto currency trading is increasingly becoming popular in all parts of the world, and there are 2 primary ways to trade crypto currencies. Investors and traders need to understand the dynamics driving the prices of these crypto currencies before engaging in any trading activity. The information asymmetry could eventually end up in losses for investors, but there are many retail investors who have been able to ride the tide of crypto currencies with accuracy and make millions of dollars from their tiny investments. In the future, we expect regulatory authorities to be proactive in regulating trading activities related to crypto currencies, which should add a degree of stability for the industry.