Trading in Turbulence
Cryptocurrency trading has become popular all over the world in recent years, but those interested in entering the markets should be aware that there are two main ways one can go about it. The traditional way is by purchasing an amount of the cryptocurrency, like Ethereum or Bitcoin, which they then store in an e-wallet, potentially with the intent to sell it at a later date in an attempt to make a profit. The other way is through CFD trading, which gives an investor the opportunity to take advantage of price changes of popular cryptocurrencies like Bitcoin in both directions—increases as well as decreases—without the need to purchase the underlying asset. In this case, that means any actual Bitcoin (or Ethereum, or Ripple, etc.). Essentially, CFD trading allows one to enter the markets by trading on volatility. Let’s take a closer look at crypto CFD trading.
Crypto CFD Trading
Many traditional crypto traders base their strategies on their belief that, over the long-term, the value of a certain cryptocurrency will rise. Their approach consists in buying as much of that crypto as they can afford, and then waiting out the period that they had set for an expected increase in value before selling it. A CFD trader takes an entirely different approach. He may grow equally enthusiastic about seeing the downturns in a market (or the crypto’s price), as he would about seeing the market flourish. This is because such volatility presents both opportunities and risks. For example, if he expected the price of Bitcoin to go up, he’d open a ‘Buy’ deal or ‘Go long,’ whereas, if he expected the price to go down, he’d open a ‘Sell’ deal or ‘Go Short.’
You’re probably thinking CFD trading sounds easy, or even less risky than traditional investing, but that’s simply not true. CFD trading, like all forms of trading, comes with inherent risk, especially when you factor in leverage (a popular CFD trading tool which allows clients to open large deals with a relatively small amount of capital—sure, it magnifies your trading power but it also magnifies risk). Plus, even though you’re trading on both increases and decreases in price, deciding which way you think a crypto’s price will go takes a great deal of research and strategy, ranging from scanning the news headlines several times a day to studying the past performance of a particular crypto to gain insight into what it might do next.
To Keep in Mind
Like we said, all traders, including CFD traders, gain vital insight by staying in touch with the news. In the case of cryptocurrencies, this would include share price updates, market analysis, and business news. However, other kinds of news are relevant too, for example news of new government regulations, power crises, and Federal Reserve policy—all of which can affect the price of cryptocurrencies. One of the most well-known cases of a policy decision impacting cryptocurrency was the ban placed on crypto trading by the government of China in 2021. In fact, the Securities and Exchange Commission (SEC) in the USA is still in the process of deciding on its regulatory approach to cryptos. Another recent case of political events having an effect was the rebellion in Kazakhstan in early January 2022, which led to the shutting down of the nation’s internet and putting an end to Bitcoin mining in the region for the time being.
Another thing to consider is that, if you choose to enter the cryptocurrency market through CFD trading you won’t have to use an e-wallet. This may be an advantage, since e-wallets have sometimes proven vulnerable to fraud. When advanced authentication techniques like biometrics and face recognition are introduced, these kinds of security issues may improve.
The Road Ahead
In addition to being able to invest in the price of popular cryptos like Bitcoin, Ethereum and Ripple, there are also other crypto-based instruments on offer. The ProShares Bitcoin Strategy ETF (Exchange-Traded Fund) became available in 2021. This instrument does not give traders exposure to the crypto itself, but only to Bitcoin futures contracts. 2022 might see approval of the first spot Bitcoin ETF in America, so watch out for this. Another factor on the horizon is that “2022 will be a big year on the regulatory front, no doubt”, in the words of Vijay Ayyar of Luno, so traders need to watch for any developments in the attitude of the SEC to cryptos in the US.
Regardless of your skill level in CFD trading, it’s a good idea to take advantage of the educational materials offered by your broker so that you enter the markets with a solid understanding of both CFD trading itself as well as the many factors which can influence price changes.