7 things you ought to know before trading bitcoins
Bitcoins are a digital cryptocurrency secured by a series of algorithmic encryptions. They use an underlying technology called the blockchain and just like a fiat currency (like the dollar) – its value keeps changing. It is, therefore, a viable option for traders to invest in.
Bitcoin’s anonymous nature and digital transparency are what makes it so popular among investors. This cryptocurrency came into the financial scene in 2013 and has seen a steady rise in its popularity ever since. In fact, a few days ago, the bitcoin prices climbed to $9,200 causing the market valuation to rise to $420 billion.
Have you too been intrigued by the use of bitcoins as a potential investment tool? If yes, then here are a few things you ought to know before you start bitcoin trading.
No ownership of the underlying asset
As mentioned in a Dollar and Sense article, while trading with bitcoins, you don’t necessarily have to own the underlying asset as you would in a bitcoin wallet. So, there will be no delivery of the bitcoin; only the difference in the entry and exit prices of the CFD contract is denominated in USD and paid out. Let’s understand this better with the help of an example from the same article. “When you trade Bitcoin CFDs using a broker like IG, you are entering into a Contract For Difference (CFD) with the broker. This allows you to go long (if you think the Bitcoin prices will increase in the future) or short (if you think the Bitcoin prices will decline in the future).” This means you do not have to own bitcoins to make a profit from them.
Bitcoin trading requires a counterparty
A counterparty in the world of bitcoin trading is an entity that is requiring to meet the contractual obligations of the trades you have made. Ideally, you should opt for a reliable and trustworthy broker as your counterparty to reduce risks. Be sure not to fall for a broker that simply offers the lowest transaction fees. When it comes to bitcoin trading, trust is something that you should invest in more than money.
When you make a profit in any CFD trade, your counterparty will be the one who pays you the profit you make.
Bitcoins are volatile
As mentioned above, the prices of bitcoins keep fluctuating. Just like there are certain external factors that affect the volatility of stocks, there are certain things that can alter the value of bitcoins from time to time. Bad news like the government’s plan to regulate bitcoins or negative opinions on bitcoins by famous investors can really hamper the possibility of bitcoin prices going up. To add to that, bitcoin’s perceived value fluctuates. This makes it somewhat similar to gold price fluctuations. The changing prices of gold is an outcome of the fluctuating value of fiat currencies. According to a post in investopedia, “Bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer”. A store value is the usefulness of an asset in the future.
Bitcoin trading is currently not monitoring in Singapore
One of the things that led to the rise of bitcoin popularity was its decentralized nature. Even today, bitcoin trading is not regulated by the government in Singapore. However, people still continue to trade in bitcoins.
What’s the spread you are paying?
No, we’re not talking about the sandwich spread here. Just the way you buy stocks, there is a spread involving for the buying and selling of financial assets. The spread is basically a form of transaction cost. It will impact your returns in the bitcoin trade.
Bitcoin performance is not tied to any one economy
In case of fiat currencies, the rise and fall in currency value is a result of some sort of government policy. This means the economy of a particular nation has a direct effect on the volatility of fiat currencies. But the performance of bitcoins is not dependent on any one particular economy. This is because it is a form of cryptocurrency that operates on the digital platform. Plus, there are no regulating bodies as of now for bitcoins. So, unlike fiat currencies, bitcoins are less likely to be affecting by external factors.
Risk management is part of the game
At the end of the day, some sort of risk is inevitable with investments. With many influential investors being speculative about the bitcoins as a potential investment option, you ought to be careful while trading in bitcoins. Although the opportunity to make a profit is huge, the risk here is much higher. Ideally, all CFD bitcoin traders should ensure that all their positions have guaranteed stops to prevent them from losing more money than they have set aside.
We hope these insights help you make smart choices while indulging in bitcoin trading. For all those of you who are new in the game, it is recommending that you keep yourself updated with the latest news and events in the field of bitcoins and cryptocurrency.
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