The cryptocurrency markets have had significant volume increases over the past decade. The market size of the global cryptocurrency markets increased to 827 million in 2020. The number of available cryptocurrencies risen from 2,817 to 7,557 from 2019 to 2021, a 250% growth. Some well-known cryptocurrencies, such as Bitcoin and Ether, experience the most daily volume. As of early 2022, Bitcoin had a market capitalization of $895 billion. This figure is more than double Ether’s value, which has a market capitalization of 44 billion. The increase in volume and market capitalization has brought cryptocurrency trading to the forefront. There are now several ways that an investor can start trading cryptocurrencies.
There are several ways to learn how to invest in cryptocurrency. You can open a cryptocurrency wallet with one of the multitudes of cryptocurrency exchanges. You can buy and sell cryptocurrency through PayPal. You can open a contract for difference (CFD) trading account and trade on the price movements of cryptocurrencies with a CFD broker. You might also consider trading cryptocurrency futures contracts. Lastly, there are ways to purchase an ETF that holds cryptocurrencies, such as futures contracts.
Opening a Cryptocurrency Wallet
If you want to know how a cryptocurrency exchange works, you first need to open a digital wallet and an account to trade on a cryptocurrency exchange. A digital wallet is an electronic wallet where you can store cryptocurrency if you want to generate a financial transaction. Your payment (and receipt) information is securely stored. You can pay for goods and services through a digital wallet. Many digital wallets will connect directly to your electronic bank account. A digital wallet removes the need to carry a physical wallet with credit cards and cash. At the point of sale, which could be a physical store, digital wallets might use a mobile device with wireless capabilities like Bluetooth and magnetic signals to generate a payment or receive cryptocurrency.
There are several types of digital wallets. In addition to the wallets you can open on exchanges like Coinbase or Binance, you can also open digital wallets on PayPal, Venmo, Google Wallet, and Apple Pay.
When you add cryptocurrency to your digital wallet, you can exchange it for other cryptocurrencies or other sovereign currencies. For example, you might use your dollars to purchase Bitcoin and then exchange your Bitcoin for Ether. Some of the more advanced digital wallets provide customers with certain types of trading tools. You might be able to perform technical analysis and see your balances in real-time.
The most efficient use of a cryptocurrency digital wallet is if you plan to spend the cryptocurrency on goods and services. If you are purely interested in investing in cryptocurrency prices, you may instead opt for a financial product that tracks the movements of cryptocurrencies, such as CFDs.
CFDs on Cryptocurrency
There are several different types of financial products that track cryptocurrency movements. One of the most popular is contracts for differences. A contract for differences (CFD) is a financial product that
tracks the trends of specific cryptocurrencies. When you purchase or sell a CFD, you do not buy or sell that actual digital currency. Instead, you are purchasing a financial instrument that tracks the movements of cryptos like Bitcoin, Ether, and many others. You are not responsible for buying the underlying digital currency, only the difference between the purchase price and the selling price.
Since you are only responsible for the profit or loss created by the CFD, your CFD broker is likely to provide you with leverage. Financial leverage is similar to borrowing to enhance your returns. You would need to post the margin in an account as collateral which protects your broker from losses you might incur. If the equity in your account drops below a specific level, your broker will promptly ask you for additional funds. Leverage cuts both ways, so be sure to only use when you’re familiar with it.
Bitcoin Futures Contracts
Another way investors can trade the cryptocurrency market is to purchase and sell futures contracts. The Chicago Mercantile Exchange offers a futures contract that tracks the movements of Bitcoin. A futures contract is the obligation to buy or sell an asset. Bitcoin futures contracts are financially settled against the CME Bitcoin Reference Rate. When you trade Bitcoin Futures, you can never take delivery of the underlying Bitcoin and use it for spending. Futures contracts on the CME also use leverage to enhance your returns, similar to how you might use leverage when you trade a CFD.
There are also Exchange Traded Funds (ETFs) that can be used to invest in cryptocurrency. The BITO ETF tracks the movement of Bitcoin Futures contracts. The U.S. Securities and Exchange Commission approve the ETF. The fund does not invest in Bitcoin, but rather the futures contracts are held in a “truck”. The ETF administration handles all of the process of buying and selling Bitcoin futures and rolling them as they expire. ETFs are generally suitable for people looking to trade cryptocurrencies from their stock brokerage account.
The Bottom Line
To start trading cryptocurrency, you need to open an account. The account could be a digital wallet on an exchange or several different payment processors like PayPal or Venmo. These digital asset holders are geared for investors who are eventually looking to spend cryptocurrency. If you are looking to invest in cryptocurrency, other financial products are geared specifically to take advantage of certain cryptocurrencies’ underlying movements. For example, you might consider trading contracts for differences that track several cryptocurrencies’ movements.
You might consider trading futures contracts on a futures exchange. You might also want to trade an Exchange Traded Fund, which holds futures contracts and tracks the movements of Bitcoin futures contracts. Some of the financial-related products that track the movements of cryptocurrencies have advanced trading tools geared for trading and investment. If you consider investing in cryptocurrencies, these platforms might be more efficient to add to your trading arsenal.