Find out which are the most advantageous ways to invest in crypto currencies:
The world of digital money, autonomous, secure, without any involvement of any form of government in its evolution and with anonymous owners, is no longer just the prerogative of science fiction movies, but has penetrated and settled comfortably into our lives, including in the field of investments . But a new dilemma arises – how do we choose the best crypto currency investment? There are two options – to buy and sell virtual currencies. Through a Crypto Exchange, i.e. online platforms where you can do “currency exchange” as in a classic Exchange or through a brokerage house whose trading platform provides leverage for trading crypto currencies without necessarily owning the underlying assets.
Why Invest in Crypto currencies?
Crypto currencies have established their position in the world of global finance, being used as a means of payment and being treated as a full-fledged asset class in the portfolios of investors around the world. On the other hand, crypto currencies are still considered among the most volatile and therefore risky assets.
Probably the most important argument for, and paradoxical and against, investing in crypto currencies is the gigantic volatility that characterizes this asset class. A daily volatility of 1% means a lot for traditional financial instruments. In order to make a comparison, in 2021, you can count on the fingers of one hand the number of times Bitcoin volatility was below 3%!
Most novice investors are convinced that they can get huge returns, in the short term, by investing in crypto currencies, but we should always keep in mind one essential aspect: the higher the volatility of an instrument, the higher the risk associated with the investment ( as well as the risk of losing funds).
What are the advantages of CFDs with support on Virtual Currencies?
CFDs also give you the opportunity to profit from falling prices
One of the advantages of CFDs , especially important in the context of assets that register increased volatility, is the possibility to invest profitably not only when the price rises (this being called a long or buy position), but also when the price falls ( also called a short or short position)! So, if you believe that the price of Bitcoin , for example, is going to fall, then you can take advantage of this development with the help of a short (sell) transaction on Bitcoin CFD . That is, you sell at the present moment something you do not have, going to buy back later at a lower price, marking the price difference between the sale and the purchase as profit.
“The Leverage Effect”
Leverage or margin trading is a mechanism that is a feature of CFDs. It allows the commitment, in an investment, of only a percentage of the value of the transaction, and not the entire amount as happens with traditional investments.
Lever size varies by vendor. For example, at XTB the leverage for CFD Crypto currencies is 1:2, which means that the investor needs 50% of the total transaction value to open a position.
Financial leverage can represent an opportunity for investors, but at the same time it also contributes to increasing the level of risk. Both gains and losses are magnified by the amount of leverage.
The incredible volatility that characterizes crypto currencies can lead to both very large profits and very large losses for an investor. Therefore, it is extremely important for CFD crypto currency investors that the trading platform has built-in risk management tools – SL (stop loss) and TP (take profit) orders.
Stop loss (SL) – This is a protective order used by investors to limit risk in trading. SL order is an order given by the investor to the trading platform which says that if the price reaches a certain level pre-set by the investor, then the platform must automatically close the trade, even if the investor is not connected to the trading platform. So the SL order is an automatic stop loss order, an extremely effective method of protecting against losses.
TP (take profit) – A similar order to Stop Loss is Take Profit, except that it is used to automatically mark profits at a price level set by the investor.
Minimum order size
One of the arguments in favor of choosing CFDs as a way to invest in crypto currencies is the possibility of making small transactions. Since the value of a single Bitcoin has exceeded several thousand Euros, this variant of trading, through CFDs, has become preferred by those who do not own or cannot afford to invest tens of thousands of Euros, newer. For example, the minimum size / minimum volume for a trade that can be opened with Bitcoin CFD (in the context of the XTB offer) is 0.01.
The Diversity of virtual currencies
In general, in investments, portfolio diversification is recommended to mitigate risks. On the same principle, it is ideal to choose a broker that offers a diversity of virtual currencies in which you can invest. For example, XTB Romania offers 14 Crypto CFDs , among which are already the “classics” Bitcoin and Ethereum , but also the newest appearances in the field such as Stellar , Doge coin , Polkadot , Ripple, Stellar, Tezos or Uniswap.
How to avoid the pitfalls of crypto space?
Crypto Exchanges are open 24 hours / 7 days a week and, in this context, liquidity can be very low. A few pieces of news related to a particular project can dramatically change the price of a coin in a very short time. Moreover, their prices react strongly to some governments’ decisions on tighter regulations or even plans to block their popularity. Consequently, we strongly recommend that you never invest in crypto currencies funds that you cannot afford to lose.
Many exchanges have suddenly shut down without warning, either due to bankruptcy or a planned scam, and their client’s funds are gone for good. In other cases, some Crypto Exchanges were attacked by hackers, and before anyone could stem the virtual danger, their customers’ funds were completely lost.
How can investors protect themselves from crypto currency fluctuations?
The increased volatility of crypto currencies is a trend that will continue for the foreseeable future. For example, Bitcoin came to cost as much as an apartment in one year (from a low of $4,000 in March 2020 to a high of $42,000 in January 2021, i.e. an increase of more than 10 times), and then, in just a few days, to drop nearly 30% back to $30,000.
But there are very rigorous techniques by which investors can protect themselves against unwanted fluctuations. For example, with the help of the short-selling feature of CFDs, investors can freeze their already existing transactions to protect themselves from unwanted market fluctuations. Concretely, hedging involves the simultaneous opening of opposite positions (sale and purchase) of the same volume which helps investors to temporarily “freeze” their already existing transactions to protect them from unwanted market fluctuations. After the danger passes, the investor can close one of the directions (sell or buy) and let the transactions continue their course subject to market fluctuations.