Cryptocurrency Trading: How to Invest in Virtual Currencies

In this article, we will address this question in detail, offering you all the tools you need to start trading this market and integrate it in the best way possible into any type of portfolio. You will learn more about the fundamental points of how to invest in cryptos; Bitcoin, Ripple, Ethereum and all other major cryptocurrencies.

Online trading, whether cryptocurrency or not, is always a war of information: only with the right information will you be able to invest at your best and grow your capital.

What are Cryptocurrencies?

Cryptocurrencies are a real revolution in the monetary world. It is no longer states and central banks that print money, but complex cryptographic algorithms that create a virtual currency with very unique characteristics: 

  • It is created in limited quantities: depending on the algorithm used, we know what amount of cryptocurrency will be available on the markets. This is in contrast to fiat currencies, for which basically central banks can, virtually, print as much currency as they want.
  • There is no central authority: the creation of currency is done by solving very complicated cryptographic algorithms.
  • Transactions are registered on a huge blockchain, that is a sort of account book accessible to everyone, in which all clients and all portfolio holders participate, providing transactions validations and computing power to the blockchain.
  • Transactions are relatively anonymous, in the sense that the crypto holding wallets are associated with a string that says nothing about the owner’s identity. The authorities can, without too some difficulty, trace the associated identity, but otherwise you can trade and keep balances in relative anonymity.

Bitcoin was the first cryptocurrency, launched in 2009, and capped to a maximum available quantity of 21 million. When BTC/USD was first traded had a value of US$0.08 and it’s currently the most popular cryptocurrency reaching an all-time high of US$38,000 in late 2020. 

Cryptocurrencies Online Trading

What we have just explained might sound very technical and perhaps will not be easily understood by those who do not have a strong background in computer science and cryptocurrencies. However, there are even more interesting aspects that concern precisely this new way of understanding currency.

Transactions are very cheap, theoretically they do not cost anything, while a little something extra can be paid so that the blockchain registers and confirms the transaction quicker.

Cryptocurrencies are very safe. In order to maliciously modify the functioning, someone would have to control 50% +1 of the connected clients, which is practically impossible. Cryptocurrencies can be associated with other types of services, such as auto-execution contracts. Cryptocurrencies potentially offer many more features than fiat currencies.

Why Invest in Cryptocurrencies?

The value of cryptocurrencies is determined purely by the force of supply and demand, without the intervention of governments or central banks. We are therefore talking about one of the freest and truest forms of trading, ideal terrain for those who want to move in pure speculation.

Cryptocurrencies have also experienced a moment of strong expansion, which has allowed those who have invested early to earn incredible amounts of money. Of course, past earnings are no guarantee of anything in the future, but with an asset so volatile as Bitcoin, it’s obviously tempting for those who want to invest as professional traders.

Cryptocurrencies will also continue to be one of the best opportunities for those who invest, especially if we take into account the fact that we can also bet on their downside, that is, by short selling cryptocurrencies.

The Birth of Cryptocurrencies and Why They Where Created

Cryptocurrencies are a technological novelty that quickly caught on, after a famous white paper was published by one of the most interesting and mysterious identities of recent years, Satoshi Nakamoto, creator under a pseudonym, of the Bitcoin system.

All over the world, experts in computer science and finance immediately understood the potential of Bitcoin, replicating the system and inventing new ones that allowed to exploit additional features. Years after the release of Bitcoin, for convenience, we can categorize all the hundreds of cryptocurrencies on the market, in three different generations:

First Generation Cryptocurrencies:

Bitcoin is the leader of this generation, the first and if we want the least evolved. In this category we find basic cryptocurrencies, generally all born as a fork of the Bitcoin project.

Curiously, the fact that they are less evolved does not mean that they are less interesting for investors. To date, all or almost all of the most traded currencies belong to this generation, Bitcoin and its clone, the Litecoin.

Second Generation Cryptocurrencies:

Ethereum is the leader of this second generation. This peer group of cryptocurrencies can also implement smart transaction, such as transactions with automatic execution and comes with a built-in "Turing complete" programming language, which allows much more advanced uses of the blockchain.

Third Generation Cryptocurrencies:

Third generation cryptos refers to cryptocurrencies that allow for more scalable systems, cooperation between different blockchains and smart contracts with formal software verification. Among the most popular cryptocurrencies of this generation, we find Stellar coin.

For the purpose of investment, however, you shouldn’t really care whether a currency is of the first, second or third generations. Coincidently, at the moment the highest value cryptocurrencies are all or almost all first generation.

Why You Shouldn’t Trade Cryptocurrencies with the Exchanges

Cryptocurrencies exchanges are websites specialised in crypto trading and exchanging cryptocurrencies for fiat currencies. You can access them and buy virtually any type of cryptocurrency with US dollar or any other currency. All you have to do is pass the KYC procedure, deposit some funds and open a buy order.

However, for those looking to invest or to speculate on cryptocurrencies, this solution is probably the worst available. In fact, exchanges have important limitations, which do not allow for agile trading operations, especially for those who want to trade with advanced strategies.

On top of that, exchange costs are higher. Between transactions commissions and spreads, traders end up paying around 5% to 12%, depending on the amount of money exchanged and depending on the exchange chosen. Traders will be faced with prohibitive costs, at least for those who want to trade!

With an exchange, traders will not have access to leverage, a fundamental tool, used with caution, allowing traders to open positions with less capital requirements. Exchanges do not offer any advanced chart analysis or tools, crucial instruments to the savvier traders, that can be applied to analyse price chart, to calculate resistances and supports levels, and to decide how and when to enter the market.

Exchanges do not allow for short selling, which means traders can't make a profit by betting on a cryptocurrency value decline.

Traders on an exchange can't manage other assets, other than the open positions in a cryptocurrency, from the same platform. This is perhaps the most important limitation when it comes to exchanges, because as professional traders recommend, hedging and diversifying the portfolio is key to minimise risk and it is never a good idea to invest in only one category of security or asset.

Taking into account these many disadvantages, traders must necessarily rely to other types of investment providers to trade cryptocurrencies. Providers that guarantee better conditions, and above, access to what are the right tools to trade and speculate on cryptocurrencies. 

CFDs Trading is the Cheapest Way to Invest in Bitcoin

What would be, currently, the best way to invest in Bitcoin? As we saw the many disadvantages and hurdles that cryptocurrencies exchanges have, the optimal solution would be to trade, and invest, through a mechanism that offers everything that the exchanges lack, all under one system.

The solution could be definitely a broker, offering CFDs trading and allowing traders to organize and monitor their investments, just like professionals would do, as well as access to the technical analysis tools not supplied by the classic cryptocurrency trading channels.

Advantages of Cryptocurrency CFDs Trading

Traders looking for a smarter way to invest and trade cryptocurrencies should consider the several CFDs contracts available with reputable brokers. By trading crypto CFDs, traders will have several advantages compared to a classic exchange website:

Operate with leverage: Chosen carefully, leverage can be a powerful instrument in a trader’s arsenal, allowing for the control of larger positions with a much smaller capital amount, which cannot be done with a direct transaction at an exchange.

Funds security: In the past there were too many cases in which exchanges were hacked by cybercriminals (Mt.Gox in 2011, BitFloor in 2012, BitCash in 2013, Cryptsy in 2014, Bitstamp in 2015, Bitfinex in 2016, Coincheck in 2018, a hack worth US$533 million, and the list goes one) resulting in huge losses and the complete investor’s capital vanishing.

With a CFDs broker, the risk is minimal. CFDs brokers offer the most advanced and secure trading platforms, protecting traders from all these problems.

Lower transaction costs: Remember that, as we have said above, the commissions traders will have to pay for trading through exchanges can exceed the 12%. With the best CFDs brokers, traders will be able to invest and pay only a few cents spread and/or commission per trade.

Advanced platforms: Traders don't have to operate via web browser, complicated exchanges with very little information, uncompressible charts and without technical analysis tools available.

When trading with a good CFDs broker, retail investors have access to all the advanced technical analysis, chart tools, even trading signals and much more, provided by the broker.

Portfolio diversity: CFDs brokers offer the possibility to integrate the account capital by investment in cryptocurrencies, but also with other types of securities. Typically, CFDs brokers allow traders to invest on any other financial instrument without any complexities, such as stocks, commodities, Forex or any other types of assets available to speculate.

Short selling: Contrarily to the exchanges, where traders can only sell a cryptocurrency if they own it on their trading account, CFDs brokers allow traders to bet (short-selling) on the decline of the cryptocurrency price.

Trading via an exchange, if the price of a cryptocurrency is declining, traders can only wait for the market correction to be completed before finding a buy opportunity. Trading via a broker also allows for more trading opportunities, not only for buying positions, but also for selling trades. 

Conclusion

From the above list of advantages, it should be clear that the best channel for traders looking to invest in cryptocurrencies, or just to speculate on the price fluctuation, is via a CFDs broker.

Still, before jumping full steam ahead on CFDs trading, you should consider that CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage trading and they are not suitable for everyone.

We recommend a further reading to our article What are CFDs and How to Trade with Them to better understand the substantial risks involved, including the possible complete loss of funds and other losses.