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Trading Cryptocurrency CFDs vs. Traditional Investing

March 19, 2020 11:56 UTC
Reading time: 10 minutes

Cryptocurrencies are arguably the next step in financial evolution. Being the first decentralised digital currency based on a system that works without a central bank or a single administrator, Bitcoin (BTC) is a breakthrough in both financial trading and asset allocation. Online currency trading has just improved… but will it replace traditional investing?

Bitcoin

Bitcoin vs. Gold Investing

People like gold, because it is a safe-haven asset. That is why most investments are made with this precious metal. But the early gold rush days are over; gold and bullion buyers shouldn't treat it as a 'get-rich-quick' scheme. However, it's still a sound long-term investment. There are insights of ancient gold mines and mining operations dating back 7000 years.

Civilisations started to trade gold around 600 BC, and it is still used by dealers and investors with great enthusiasm today. Gold is also sure to never lose its intrinsic value as a precious metal with numerous practical applications. Additionally, we should state that fluctuations are less extreme compared with many other investment commodities, including Bitcoin.

We could also assume that gold might rebound. The US Dollar is negatively correlated to gold, and any weakness in the former should positively impact the latter. The cost of mining gold might increase substantially, and more miners might cease gold mining operations. If that happens, the prices will increase as gold reserves will be limited.

Gold accounts for approximately 1-2% of market participation. An increase should lead to price spikes. In addition, any uptick in the inflation rate might increase the price of gold. Furthermore, as the Debt-to-GDP ratio in developed countries has been steadily increasing, this is a sign of further money supply, which is positive for precious metals, such as gold.

Bitcoin has a finite supply, but it has one distinct difference when compared to other investments. For the first time we have something that is not fully controlled by any entity, like a government or bank. However, Bitcoin is unlikely to fully replace gold as an investment asset, because the system has yet to scale itself in common marketplaces, where it can achieve a truly "universal" status and be used as a legitimate form of currency.

A Bitcoin Investment Strategy

After the irrational behaviour of investors into the end of 2017 in the cryptocurrency market, Bitocin started to stabilise, even though can be considered still highly volatile. After the first half of 2019 has started off favourably for Bitcoin with prices pushing back significantly above the psychological barrier at 10,000 USD, topping around 13,800 USD, the cryptocurrency gave back some of those gains, it is still up around 100% from its yearly opening price as of November 2019.

While some consider the solid performance in 2019 a positive sign, other's consider the move a "dead-cat-bounce", argue that it is reminiscent of the .com bubble, and will burst hard, only with a slight delay.

While features like transaction batching and SegWit have made Bitcoin more competitive lately, putting its speeds closer to other cryptocurrencies like Bitcoin Cash, it remains to be seen if Bitcoin will be the cryptocurrency that everyone ends up using.

Given the fact that Bitcoin is significantly up on the year 2019 compared to its crypto-competitors, this could surely act as a first positive indication and it seems likely that Bitcoin has a brighter long-term outlook than many crypto-currencies.

Still, technically a sustainable break back below 7,000 USD could be clearly considered a bearish signal and bring a drop towards 5,500 USD and even lower into the region of 3,000 USD in 2020 on its way in 2020.

BTC Futures

Also the adoption of BTC futures should be seen as a very positive step for Bitcoin. Banks typically state that Bitcoin is generally a bad investment because it falls in the unregulated space, thereby calling it "risky"; and they are saying this as it could eat into the personal banking services of banks, making it easier and cheaper to transact funds between people and/or merchants using Bitcoin technology.

The introduction of BTC futures has been a move into the regulated space, making it a reduced risk for Bitcoin's financial profile.

Other Bitcoin Investment Risks

There could be a major push by governments to shut the technology down, this is because it would rival their own national currencies, making it harder to implement monetary policies. In addition, banks have deep pockets and may decide to buy out Bitcoin, in order to protect their personal banking department revenues that are at risk from this technology.

To the conspiracy theorists, it could also be possible that banks and governments could employ hackers to take out the technology, rendering it unsafe and causing a mass exodus of capital within the cryptocurrency market. This is one of the general bitcoin security risks. As central banks print more and more money over time, devaluing the value of flat currencies, their current QE programmes could be deemed very risky, bloating central bank balance sheets. As central banks embark on such wild decisions, they are demonstrating no accountability in terms of safeguarding the long-term value of their respective flat currencies in a 'currency war' environment.

The key factor with the CME announcement is that large investors can now hedge their exposure, so they have no reason to avoid Bitcoin. The coming months and years will reveal how much institutional interest there is. If they can hedge, they will go in.

During the dot.com bubble burst, conservative funds were forced to invest in risky high-tech stocks, because their results looked poor in comparison to the tech funds. The same may happen to cryptocurrencies. When funds are achieving double digit returns by putting some of their funds into crypto, everyone will get on board.

Is Bitcoin Safe?

It is claimed that Bitcoin cannot be hacked, manipulated, or altered; however, exchanges or digital wallets are vulnerable, just like online bank accounts. If you hold any Bitcoin, you may become a target. Bitcoin doesn't actually exist in a physical sense, and held in the wallet are secure digital keys in relation to Bitcoin.

The private key is a secret code allowing the user to prove ownership of their Bitcoin. Wallets installed on smartphones using an app, or web-based wallets, can also be activated on currency exchanges. Bitcoin holders need to ensure that their computer's security is up-to-date, and such exchanges require a high-level of security.

James Hill, a software developer at Scott Logic consultancy, says that the security of the core blockchain algorithm (which underpins all cryptocurrencies) is strong. He mentions that the real risk comes from losing the keys that prove coin ownership.

How to Trade Bitcoin

When it comes to Bitcoin, traders often ask questions such as:

  1. Where to trade Bitcoin
  2. How to trade Bitcoin for USD
  3. Can we trade Bitcoin for profit?
  4. Is there a way to trade Bitcoin on Forex?
  5. How to trade Bitcoin on MetaTrader 4 (MT4)

A good way to trade cryptocurrencies like Bitcoin is by doing so with the BTC/USD CFD that Admiral Markets offers, for example. Due to the uncertainty surrounding Bitcoin as an asset, you might like to exploit its daily movements to your advantage.

Simply put, when investing in Bitcoin, the traditional buy and hold strategy is still unsafe which can be seen by the price developments over the year of 2019.

The Bitcoin strategies you could choose to adopt are daytrading, intra-week trading, and/or scalping. You can also watch live webinars hosted by professional traders, and you can ask for trading-related advice on the MT4/5 trading platform.

Source: Admiral Markets MT5 Supreme Edition, BTCUSD, Daily - Data range: from November 21, 2018, to November 21, 2019, accessed on November 21, 2019, at 3:00 pm BST. - Please note: Past performance is not a reliable indicator of future results.

Traditionally, there is a price cycle in every asset and financial instrument. We distinguish between four major price/market cycles.

  1. Accumulation
  2. Mark-Up
  3. Distribution
  4. Mark-Down

Depending on the market, they share similar characteristics, and go through similar phases. Markets are cyclical, they can go up, they peak, they decrease (or lower), and then they bottom. When a cycle is finished, the next one begins. Many investors and traders usually fail to recognise that markets are cyclical, or forget to realise the end of the current market phase. In addition, even when you accept the existence of cycles, it is almost impossible to pick the top or bottom of such a cycle.

However, having an understanding of cycles is essential if you want to maximise trading or investment returns. By using charts, you will be able to exploit major BTC/USD CFD movements on both lower time frames, such as the five-minute chart, and higher time frames, such as daily charts. You might also want to invest in the BTC's strength (or weakness) by trading the weekly and monthly charts. By using the offered leverage (from your broker) in a smart way, and by trading BTC/USD CFDs, you might potentially make much higher returns than by simply buying BTC.

Conclusion

Should Bitcoin become a form of currency?

As with all technology, something better may come along in the future, and when this happens, it could cause Bitcoin's value to drop, doing so in a spectacular fashion. Unlike currencies, Bitcoin has no interest yield, therefore, in a normalising monetary policy environment with rising rates, it's best not to try and treat this commodity as a long-term store of value to fund your retirement.

Although BTC presents innovation and perhaps evolution as a virtual payment system, there are still many issues in terms of security and sustainability that need to be addressed before customers can be encouraged to use it or accept it as a method of payment. Whilst some traders may believe that Bitcoin could eventually be a viable investment choice, it is unlikely to ever surpass the stability and versatility of gold as an investable commodity.

It is recommended by professionals traders to start with a small investment amount to begin with, perhaps a small fraction of your capital (about 0.1%) to learn how it works, how to trade it, and how to handle it safely in a wallet. If you're going to trade BTC/USD CFDs – or Gold Spot CFDs – it is recommended that you pay close attention to the risks that may be involved with trading, and always practise any trades on a demo trading account first, before venturing into the live market.

About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.