How can I invest in Bitcoin and other cryptocurrencies?
While online coin brokers and exchanges claim to offer access to physical Bitcoins, most are unregulated and, therefore, pose considerable risks to investors. However, there are some regulated ways to invest in Bitcoin.
Bitcoin is available to trade through Contracts for Difference or CFDs. While you would not have the physical ownership of one or more Bitcoins, you would be able to speculate on the value of the cryptocurrency in the same way that you would trade an index. Furthermore, this allows you to take either a long or short position on the cryptocurrency, allowing you to the ability to profit from falling prices as well as rising ones.
A position is opened in the form of a contract. A contract means that you stand to profit from movement based in points – for Bitcoin (USD) this entails a single dollar. Contracts are priced at different levels, with a point having different value depending on the size of a contract that you undertake. A maxi contract has a value of $100 per point on a 12.5% margin, while a mini contract is priced at $10 a point but requires a larger capital outlay, a 20% margin. The commission on a maxi contract is £10 in, £10 out, while a mini contract carries a £1 cost each way.
A long position would see profit when Bitcoin increases in value – relative to your per point exposure – while a short position profits when Bitcoin falls. Proportionate losses would be made should it move unfavourably.
Other cryptocurrencies available to trade are limited to Ethereum, however products such as exchange traded funds (ETFs) may offer the exposure to Bitcoin and cryptocurrencies without needing to trade the product itself.
However, trading Bitcoin comes with immense risks. Given the value of Bitcoin is incredibly difficult to quantify effectively, daily movements of 5-20% in either direction on little or no news regularly take place. This makes long-term positions more difficult to support, which has forced Bitcoin traders to pursue short-term strategies.
Bitcoin and cryptocurrencies are not for me. What are my other options?
If you’re searching for trading opportunities that have a much lesser tendency to post sharp price movements, then you may be interested in trading indices.
Indices, selected lists of the largest and most traded companies on a particular stock exchange, are traded on a contract basis, however they have a much broader range of influence and drivers than Bitcoin. These include, but are certainly not limited to, corporate news, foreign exchange markets and macroeconomic factors.
As detailed above, indices trade on a per point basis, however one advantage of trading indices as opposed to cryptocurrencies is that the margin required to open a position is much smaller. For example, the UK’s blue chip index – the UK 100 – requires a margin of as little as 5%, although this is dependent on trading hours.
Alternative investments that trade on a similar basis include Commodities, including Crude Oil and Gold, and Currencies, such as GBP/EUR, EUR/USD or even a trade-weighted index such as the US Dollar Basket. Like indices, these are subject to a diverse range of influences and, while not subject to the same volatility as a cryptocurrency, can often see daily price movements of up to 5%.
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