Exchanges, wallets or Forex: what’s the best choice for trading cryptocurrencies?
There are a least in 5 different ways you can invest in cryptocurrencies nowadays. They are: Bitcoin ATMs, Bitcoin futures, trading cryptocurrency on exchanges, Forex trading and storing coins in wallets. Each of these methods has its pros and cons. The exchanges are periodically hacked, use of wallets implies loss of money on commissions and time on transactions, while on Forex there is a limited choice of cryptocurrencies and there are swaps. In the article below we will discusse the advantages and disadvantages of each option to help you make the best investment decision.
Exchange, wallets or Forex: where is better to trade cryptocurrencies
In 2017, cryptocurrency became the most profitable asset. True, the risks of cryptocurrency were also the highest among traditional and non-traditional investment instruments. Although cryptocurrencies are intangible, they cannot be seen or touched, the rush demand for coins has led not only to the emergence of dozens of exchanges, hundreds of purses and exchangers, but also to the emergence of a separate direction in the production of video cards for mining, specially produced for the issue of crypto coins. Forex brokers, who added a new non-standard instrument to their assets, did not stand aside. And though many Forex-traders still prefer classical assets (currency pairs, metals, securities), cryptocurrency also gradually gain their attention, first of all, by their profitability.
Cryptocurrency trading options
Today, a trader can buy a cryptocurrency almost at every step, starting from exchanges and exchangers, ending with Bitcoin-ATMs. And let the terminals offer only Bitcoins, buying BTC and then depositing it to a card will take a maximum of 10 minutes without the risk of hacking and verification.
A trader has several options for trading cryptocurrency:
- futures. In December 2017, the two largest US exchanges - CME (Chicago Mercantile Exchange) and ITS (Chicago Options Exchange) launched Bitcoin futures trading, thereby confirming the status of the BTC as a full-fledged financial instrument;
- exchange. The trader registers an account on a cryptocurrency exchange, after which he buys an asset, earning on the sale in the future at a better price;
- purse. The trader also earns on the cryptocurrency price increase, but buys it through exchangers or on the stock exchange;
- broker. A trader makes money on cryptocurrency by working with a Forex broker.
The advantages and disadvantages of each of these options, we will consider further.
1. Bitcoin Futures
With the launch of bitcoin futures, stock investors with high capital have the opportunity to invest in cryptocurrency without the risk of losing money on unregulated exchanges. Initially, it was even supposed that the bitcoin rate would decline due to the dominance of the “bearish” capital, but in fact the launch did not particularly affect the price of BTC. The weak points of this investment option are the high volume of start-up capital and the tax issue – the recognition of Bitcoin as an investment instrument officially imposes tax liabilities. The second challenge – you need to understand the principles of operation of CBOE, CME and futures, as well as the rules of the US stock market. For regular private traders or long-term investors the principles of wallets or cryptocurrency exchanges are more transparent and understandable.
2. Trading on cryptocurrency exchanges
According to the Coin Market Cap website, there are more than 1,300 cryptocurrencies in the world, and their number is growing every day. Each cryptocurrency is quoted on at least one exchange, of which there are dozens. Large exchanges have a wide range of cryptocurrencies listed, which can be bought after registering the wallet on the exchange. You can also mine cryptocurrency on exchanges. For example, Criptoria Exchange offers the exchange and mining of more than 220 coins. Exchange forums allow you to exchange views on potential cryptocurrency movements.
Another advantage of the exchanges – the possibility to make money on the difference in coins’ prices at different exchanges. It all goes down to buying a cryptocurrency on the exchange, where the rate on it is the lowest, transferring coins to another exchange, where the rate is higher, and selling. Though the amount of such coins is decreasing, and the transaction commissions “eats up” the profit, the possibility of earning still remains.
Disadvantages of exchanges:
- risk of losing money. It’s enough to recall the examples of MtGox and BTC-e. The lack of regulation generates a series of fraudulent actions on the part of the exchanges themselves. After all, it is unlikely that one of the traders will find out if there was a hack in fact, or whether the exchange itself initiated it. In the case of hacking a wallet or illegal actions on the part of the exchange, there is nowhere to complain to the trader;
- no short positions. A trader can buy a currency, wait for the price to rise, sell a coin. But to make money on the fall of the exchange rate is not allowed. A short position is a kind of transfer of an asset to a trader on credit, which will be repaid upon closing a position. The exchanges themselves do not do this. And only some exchanges (Poloniex, Bitfinex) have the technical ability to take cryptocurrency on credit from other traders at their own risk and peril;
- restrictions on working with fiat money. For example, a top South Korean exchange Bithump only works with the South Korean Won;
- difficulties with verification.
3. Storage of cryptocurrencies on wallets
Wallets differ from exchanges by a relatively greater security – they are less likely to be hacked, although this also happens. True, for a smaller risk compared to the exchanges, the trader has to pay an additional commission and lose on transaction speed (with online wallets). Someone prefers to work exclusively with wallets, not trusting the exchanges, and someone uses the wallets for long-term storage. Wallets are more a trading tool than an investment option.
4. Cryptocurrency trading with Forex broker
It differs from all previous Forex trading options in that it is not a real asset, but CFD (contracts for the difference in prices). A trader does not receive a physical right to own a cryptocurrency, but only earns on his prediction as to where the price will go in the future. But the essence of earnings remains the same: earnings on the difference between the purchase and sale price of an asset.
In comparison with exchanges or wallets, cooperation with a broker looks more reliable for several reasons:
- brokers are controlled by regulators and independent auditors;
- traders' money is located on segregated accounts (accounts separated from the broker’s operating funds) in world-renowned banks with an impeccable reputation;
- traders 'accounts are not cracked as often as it happens with exchanges' wallets;
- there are compensation funds that partially compensate the trader’s losses in case of a broker’s bad faith. For example, Financial Commission compensates up to $ 20 000;
- like exchanges, brokers periodically go bankrupt, but still a broker with 10 years of experience inspires more confidence than newly-made exchanges. And though brokers have technical failures, with exchanges they are much more often and at the most inappropriate moments.
The advantages of trading cryptocurrencies on Forex:
- There are no restrictions on the use of strategies. Transactions can be opened both for purchase and for sale (the broker itself acts as the lender of the trader). Hedging is allowed (opening a position in both directions at the same time);
- orders are executed instantly. Although slippage is also inherent in Forex, but it is a question of seconds. For exchanges, the speed of execution of an order depends on the commission set by the trader, and delays in the execution of transactions can stretch for several hours. Scalping is allowed in Forex;
- There is the possibility of using trade advisors.
Despite the obvious advantages in comparison with the exchanges, Forex has several disadvantages:
- limited supply of cryptocurrencies. On cryptocurrency exchanges dozens of crypto coins are listed, while brokers in most cases offer only BTC and ETH. Maximum offer is limited to coins Bitcoin, Ethereum, Bitcoin Cash, Bitcoin Gold, Ethereum Classic, Ripple, Dash. Although there are brokers providing more cryptocoins, but this is rare. The introduction of the remaining coins from at least TOP-20 is difficult to implement technically;
- no overflow. Exchanges and exchangers allow you to quickly flow from one coin to another. For example, from Dasha to Stellar, from Stellar to Monero, etc. In Forex, you can only close a position on one asset and open on another, losing money on the spread;
- swap. This is the main obstacle due to which traders prefer exchanges. In a market where volatility can reach 20-30% in one day, patience is important. It is important to wait out the recession and wait for growth. Brokers charge a swap – a commission for the transfer of transactions on the next day. And if there are no days off at cryptocurrency exchanges, then brokers take a tripled swap after the weekend;
- have a stop out. A position can be forcibly closed if the trader’s deposit falls below an acceptable level. If a coin can be stored on a wallet for an arbitrarily long time, then using a leverage deposit will be reset before the cryptocurrency depreciates.
You can not say which investment option is better or worse. Each is optimal for a particular situation:
- exchanges are suitable for those who spend days at the computer, making dozens of transactions with different cryptocurrencies on different exchanges. The potential risk of breaking the wallet traders pay for the expense of trade;
- wallets are suitable for those who prefer to reduce risks and work on long-term strategies, counting on growth in the distant future. Coins on cold or hardware wallets can be stored for years when the blockchain is periodically updated;
Forex will be interesting to those who earn on intraday strategies and save on swaps, preferring a moderate risk. If a trader has already established cooperation with a broker, then he does not need to open an account on the exchange.
You can combine all options to diversify risks. Your are welcome to share your opinion in the comments: which version of cryptocurrency trading seems best to you in terms of risk, cost and efficiency.
Author: Kate Solano, Forex-Ratings.com