The cryptocurrency market continued to gain traction in 2019, and early 2020. The exchange rate for the most liquid cryptocurrency Bitcoin saw a round trip from 4k up to 13K and back to 6K. In early 2020 the exchange rate versus the US dollar reversed back to 4K in March. The wild ride of Bitcoin and most of the other liquid cryptocurrency was because many investors began to see the returns as correlated to riskier assets. This means that instead of cryptocurrencies beating to their drum, the trading returns of bitcoin started to move in tandem with the broader US equity indices such as the S&P 500 index. There are multiple ways to trade cryptocurrencies including using a cryptocurrency account, contracts for differences, or even a futures account.
How to Start Trading Cryptocurrencies
Over the past 5-years, the number of ways investors have been able to engage in cryptocurrency trading has changed. The way you would trade cryptocurrencies also depends on how you plan to use different cryptocurrencies.
If you want to invest your cash but also might want to use your cryptocurrencies to buy goods and services, then you need to open an account that provides you with an address and a way to store your cryptocurrencies. There are several exchanges such as Coinbase, and Binances, that allows you to open an account and deposit either sovereign funds or cryptocurrency to begin to trade. Most of the larger cryptocurrency exchanges only take certain sovereign funds such as the US dollar, the euro, the British pound, and the Yen. Some also take all the major currencies.
Before you make a, you will need to have an address where you keep your cryptocurrency, which will be supplied to you by the exchange. To transact, you can pick the currency and cryptocurrency you want to buy and sell, and your transaction will be placed like any other trade. If you want to remove your cryptocurrency from your account, you will need to have another address to send it to. Generally, these types of accounts do not provide leverage through a margin account.
An alternative is to use a derivative, such as contracts for differences (CFDs) or futures contracts. A contract for differences is a financial instrument that tracks the movements of underlying assets such as bitcoin. CFDs are easier to trade compared to the underlying cryptocurrency and act like all the other CFDs that are available at your brokers such as EUR/USD or the S&P 500 index.
One of the benefits of trading using CFDs is that they are generally marginable securities. This means that your broker will likely offer you leverage. For example, you might only need to post $1 for every $10 you control when you trade a bitcoin CFD.
Another alternative is trading cryptocurrency through futures contracts. A futures contract is the obligation to purchase and sell an asset at some point in the future. The bitcoin futures contract trades on the Chicago Mercantile exchange. Each contract on the exchange holds 5-bitcoin. The futures contracts are valued in US dollars. The bitcoin futures contracts are financially settled which means that you do not have to deliver or receive bitcoin if you purchase or sell a bitcoin futures contract. There are 6-consecutive monthly delivery periods followed by two additional Decembers. This means that if you want to trade longer than 6-months, you might only have access to a December delivery.
The Bottom Line
The upshot is that to trade cryptocurrencies, you generally have a choice between opening a cash account or using financial products such as CFDs and futures contracts. While cryptocurrencies are a separate asset class, in the past 15-months the movements of bitcoin the most liquid cryptocurrency have been closely tied to riskier assets such as stock prices.