The recent spike in cryptocurrencies prices and trading volume suggests an increasing interest from investors who want to take part in this monetary revolution. This revolution started 10 years ago with the launch of the Bitcoin (BTC), the first, biggest and most important cryptocurrency, which has gained more than 114% since the beginning of January at the time of writing.
The two most popular ways to take advantage of the crypto-currency market is to
- Buy coins through an exchange
- Trade cryptos via a CFD broker. Each way has its own advantages and disadvantages.
To decide which method is the best for you, you should first think about and develop your investment strategy. Owning cryptos (long term horizons) or trading them (short-term horizons) do not offer the same level of protection, fee scheme, payment methods, withdrawal methods, etc.
Let’s discover what differentiate them.
What does owning cryptocurrencies imply?
Owning cryptocurrencies is great if you want to use them to shop or to transfer money anywhere at any time quickly (faster than with normal bank transfers), at a lower cost and with a higher degree of anonymity than with traditional wire transfers.
To own crypto-currencies, you first need to find an exchange you can trust, one that’s available in your country, and that offers a payment method for buying cryptocurrencies with fiat currencies (American/Australian/Canadian Dollars, Euros, Sterling…).
Once you’ve bought your virtual currencies, you have to put them into a “wallet”, a program that can contain them. Most exchanges have their own “wallet” that clients can use, but it is widely recommended that you use a wallet that only you have access to and fully control.
There are different types of wallets, they can be gathered into two main groups: “cold” and “hot” wallets. The main difference is whether or not they are connected to the Internet. While “hot” wallets are connected to the net, “cold” wallets are not.
Cryptocurrency buyers and owners are often seen as soft and easy targets for hackers, as virtual currencies transactions are final, there is no anti-fraud protection, nor is it possible to reverse the charges offered by financial institutions in case of problems, as explained by IBM X-Force senior cyber threat researcher John Kuhn to NBC News. Cold storage is thus usually a more effective solution to protect your funds, as it limits the risk of hacks. The two most popular cold wallets are physical hardware wallets, such as external hard drives, and paper wallets.
Why trading currencies can be a safer and cheaper option to take advantage of the crypto-market volatility
When held on digital services, cryptocurrencies are vulnerable to cyber-thieves. Hackers usually target crypto exchanges to drain their crypto wallets (hence the reason why you shouldn’t keep your cryptos online in an exchange). In addition, as the crypto-sphere is quite new, it isn’t a regulated industry.
For this reason, using derivative financial products like CFDs (Contract For Difference) through a regulated broker can be an interesting option for you to make a profit from the crypto-market.
A CFD is a financial contract you enter into with the broker you’re using. This contract allows you to benefit from a rise (or fall) in the price of an asset, as you will exchange the difference between the opening and the closing price of your trading positions with your broker.
An important aspect of CFDs is that you never actually own the underlying asset. So, you won’t own any coins when trading CFDs on cryptos – you will simply take advantage of their price fluctuations.
Of course, using CFDs is only a good option if you want to take advantage of short-term crypto-currencies price movements, because it is a leveraged financial product that relies on margin trading. It means that as a CFD trader, you only need to put aside a part of the total value of your position to open it – this is called the margin. This technique therefore increases your market exposure.
Conclusion: owning vs. trading crypto-currencies
Are you not sure about whether you should own or trade cryptocurrencies? Think first about your financial needs, goals, and horizons.
In addition to being able to transfer money and use cryptocurrencies to shop whenever you want, owning virtual currencies can also be compared to longer-term investments. Having coins in your wallet means that you can hold your virtual currencies until you want to sell them at a higher price later on in the future. In the meantime, you won’t pay fees for holding them.
Trading crypto-currencies via leveraged products like CFDs means that you do not own any coins, you’re just taking advantage of the crypto market volatility instead. So, trading crypto-currencies is a short-term investment strategy, where you are using price changes to make a quick profit without holding the underlying asset.
So, ask yourself: would you consider yourself as an investor or a speculator?
While both seek maximum profit, an investor doesn’t have the same trading strategy, level of risk aversion and objectives as a speculator. In any case, the key to successful investing of any kind is to use the right platform for your needs.
Exchanges appear to be riskier than CFD brokers, who are regulated and offer protections to retail traders. Brokers can be useful for you to be able to apply your short-term trading strategy and appropriate money management rules in a responsive and regulated trading environment, while strengthening your financial knowledge.
With a regulated, reliable and safe broker, like Skilling, you can make your money grow while taking advantage of protections offered to retail traders. Regulated brokers in Europe, for instance, are part of a fund recovery program that can protect trader funds in case of bankruptcy. The European Securities and Markets Authority (ESMA) also imposes some restrictions on CFDs, such as a limited leverage effect (2:1 for cryptocurrencies), a 50% margin close out rule, and a negative balance protection.