For those financial traders who have decided that bitcoin is a worthwhile investment, two initial paths are possible. One way of investing in bitcoin is similar to that for paying people with it, and the other involves derivatives trading. For more information on derivatives.
TRADING BITCOIN VIA AN EXCHANGE
Those wishing to purchase actual bitcoin will need a wallet for starters, followed by some bitcoin to fund it with. The most common method of buying bitcoin is from an exchange, in return for some fiat currency. Rarely though, will an exchange accept credit card or PayPal payments.
Choosing between bitcoin exchanges is a matter of weighing up different features, with security and legitimacy the two key concerns.
The inherent difficulty in finding a secure exchange was highlighted in both 2014 and early in 2015 by the problems hit by Mt. Gox and Bitstamp. Mt. Gox was bitcoin’s first exchange, and by the beginning of 2013, also the world’s largest. In February 2013 it went offline; a later bankruptcy filing revealed that the exchange had lost 750,000 of its customers’ bitcoins, blaming hackers.
In January 2014, Bitstamp also suspended trading after a hacker breach. Bitstamp came back online a few days later, but only after hackers stole 19,000 bitcoins.
Developers are working to improve bitcoin’s security and reduce the chance of theft via hacking. But at one point in 2013, it was estimated that more than 5% of bitcoins in circulation were obtained illegally.
Once you have chosen an exchange, a trading strategy is needed. Most traders will either buy and sell bitcoin on a daily basis, or hold onto bitcoin on the grounds that its price will increase in the long term.
TRADING BITCOIN VIA DERIVATIVES
Shorting bitcoin is tougher than shorting more traditional currencies, mainly because most bitcoin exchanges are not as tailored to investments as forex exchanges. The difficulty in making complex bitcoin trades – as well as the need for a specific wallet, lack of credit card or PayPal funding, and scarcity of currency – means that bitcoin does not have the same liquidity in trading as other currencies.
Those traders wishing to speculate on bitcoin’s volatility can turn to bitcoin derivatives. These products do not involve holding any actual bitcoin. They work by allowing you to open contracts and make bets on what bitcoin will be worth after a period of time, or what direction bitcoin’s value is moving in.
CFD trading allows a way to invest in bitcoin while avoiding some of its limitations and risks.
Bitcoin is attractive to traders because of its extreme volatility, but volatility brings with it great risk. Bitcoin can lose or gain huge amounts in short spaces of time, so anyone aiming to be involved in bitcoin trading needs to be aware that losses can come large and fast.