After the revolutionary surge in 2017, virtual currencies have become assets that deserve serious attention from market participants. Able to generate large profits in very short periods due to significant price swings, leading cryptocurrencies are an attractive option for both speculation and portfolio diversification away from traditional assets. Which ones are worth trading now? Can their prices be predicted? What type of investment strategy is appropriate? Here are five important considerations to keep in mind before trading virtual currencies. Learn how to invest in cryptocurrencies with our guide and get started trading Bitcoin, Ethereum, Ripple and others.
- Cryptocurrencies do not work like the euro or the dollar
The value of fiat currencies is fundamentally different from that of many cryptocurrencies. Backed by a national or regional economy and closely tied to the everyday lives of citizens, government-issued money primarily serves as a medium of exchange that facilitates daily commerce. Its value can fluctuate, but generally not dramatically. The same cannot be said for many virtual currencies, whose values can change substantially and frequently. For example, compare the pound, the euro, Bitcoin and Ethereum during 2017. Last year the British pound fluctuated between about $1.23 and $1.35, and the euro ranged from roughly $1.05 to $1.24. In the same period Bitcoin rose from just over $700 to around $16,000, while Ethereum moved from about $10 to $741.
- Cryptocurrency prices behave like roller coasters
In 2017 cryptocurrency prices experienced volatility that would be unthinkable for most traditional currencies and many other financial assets. That same extreme volatility continued into early 2018 and beyond, with prices moving sharply up and down—even within the course of a single day. When people speak of the dramatic volatility of cryptocurrencies, they are referring to these extreme swings that can send Bitcoin and other coins surging or plunging in short spans of time.
There is no doubt that 2017 was an extraordinary year for virtual currencies, and the first months of 2018 can be seen as an extension of that period. For now—and possibly for several years—cryptocurrencies are likely to remain subject to such wild fluctuations, which can produce either substantial losses or substantial gains.
- Large gains are concentrated in a relatively small number of cryptocurrencies
Which cryptocurrencies were worth investing in during 2018? That is a relevant question given that there are roughly a thousand different coins. For trading purposes it makes sense to focus on a curated selection, starting with the largest by market capitalization in 2017. Leading the list was Bitcoin (about $54 billion market cap), followed by Ether (around $27 billion), the native token of the Ethereum platform, and Ripple (about $7 billion). Emerging among the top ranks was Bitcoin Cash (about $5 billion), created in 2017 as a fork of Bitcoin’s blockchain. Also in the leading group were Litecoin (approximately $2.5 billion), NEM (around $2.4 billion), Dash, IOTA and Ethereum Classic (roughly $1.4 billion each), with NEO closing out the top ten at about $0.937 billion.
- Store cryptocurrencies in a digital wallet
One key question is: what is the best way to trade virtual currencies? The most straightforward approach is to buy the cryptocurrency you want outright. You can do this on online exchange platforms that accept fiat currencies such as euros or dollars in exchange for Bitcoin and Ether. For some coins a direct fiat-to-coin exchange may not be available, so you might first buy a major cryptocurrency such as Ether and then trade it for the token you want. Alternatively, you can sell a product or service online and accept payment in a cryptocurrency. To hold these intangible assets you will need a digital wallet—a secured account protected by a password or private key. To use your funds you can access them through an online platform or wallet software.
- Trade cryptocurrencies using contracts for difference (CFDs)
There is another practical way to trade cryptocurrencies: contracts for difference (CFDs). With a CFD you do not purchase the underlying coin; instead you enter a derivative contract that mirrors the coin’s price movements. The contract is opened at one price and closed at another, and the difference determines your profit or loss. CFDs are attractive because they typically require only a margin deposit—a small percentage of the notional value—rather than the full cost of the cryptocurrency. This allows traders to gain exposure to high-priced coins such as Bitcoin without owning the full value. Additionally, CFDs enable both long and short positions, so you can profit from rising or falling prices without actually holding the cryptocurrency.
Now that you understand the basic ways to invest in cryptocurrencies, you can begin trading while following the guidance and tips available on our site.