During 2017, Bitcoin (and by inference the cryptocurrency industry) underwent a radical transformation from an underground, alternative payment methodology to a high-profile currency on the verge of mainstream adoption.
This shift was mainly due to the phenomenal increase in the baseline Bitcoin price. In short, it started its run at just under $1000 US in January 2017 to circa $13 860 in December of the same year. Even though the price has been reeled in back down to circa R6300, it is still standing its ground and is well on its way towards mainstream adoption.
This fact can further be proven by the fact that there are presently more than 120 cryptocurrency hedge funds, and Chicago Board Options Exchange (CBOE) opened the first Bitcoin Futures in December 2017.
Investing in crypto: Trade or buy and sell?
Even though there is every reason to believe that Bitcoin, followed by other digital coins, is on its way to being accepted as a fiat currency, it’s price is still extremely volatile. Therefore, the financial analysts at Jones Mutual believe that the following question must be asked and answered before you go ahead and spend money on virtual currencies:
Should you buy and sell digital coins, or should you leverage the volatile price movements via the CFD cryptocurrency trading vehicle to grow your wealth portfolio?
Here are the pros and cons of each option:
Buying and selling digital coins
The cryptocurrency industry’s well-known price volatility is the biggest negative to buying and holding (or selling) coins. For example, the Bitcoin price is known to lose just under half of its value in a very short space of time.
The latest example of this phenomenon occurred in June, July 2017. The Bitcoins price rose to $3000 in June 2017 and then dropped 36% to $1869 by mid-July. The price started climbing soon after, but the salient point here is that it is challenging to predict the sudden drops in price. And you could be left holding thousands of USD of coins that are worth much less.
On the other hand, there is merit in buying digital coins. However, this exercise needs to be seen as an ultra-long-term investment that will be allowed to ride out the interim price movements, no matter how big or small each one is.
CFD cryptocurrency trading
The single most important reason for trading Contracts for Difference is that they allow traders to leverage an underlying asset’s volatile price movements to drive trading profitability. In other words, the more unstable an asset’s price, the more CFD trading opportunities it presents to a trader.
It should be noted at this juncture that CFD trading is a high-risk trading model and, when trading, risk-reducing tactics should be used to reduce the exposure to risk. Succinctly stated, it is possible to place low-risk trades. All you need to do is to trade wisely and knowledgeably, employing risk-reducing trading strategies.
For the sake of completeness, there are many different well-known trading strategies used to reduce risk. A couple of the more popular trading strategies are as follows:
Use the 5/15 rule
The best way to describe this rule is to cite a practical example:
If your total equity is $600, then the maximum amount you should risk at any given moment is 15% of the $600 which equal $150. Additionally, each trade should be no more than 5% of the total 15%. Thus, the total amount that you should risk on any trade is no more than $50 (5% of $150). Finally, you can only open three trades at a time as 3 x 5% is equal to 15%.
Set Stop Loss points
Unless you sit and watch your trades every minute that they are open, and even then sometimes the price swings from a profit to a loss too quickly to spot, it is vital to set the Stop Loss indicator at the maximum amount you are prepared to risk on an individual trade. This figure gets worked out using the 5/15 rule, or any other maximum risk exposure rules.
Final thoughts
This is just an overview of the differences between, and the pros and cons of, buying digital coins and trading on their price movements. At the end of the day, the decision is up to you and the current price volatility levels as well as your financial circumstances should be taken into account when deciding what to do.