There are several different trading instruments that you can use. Your knowledge, experience, and approach to investing will help you determine over time which way to trade cryptocurrency is right for you.
Trading with CFDs.
Where to trade cryptocurrency? You can gain exposure to digital currencies by purchasing them on an exchange and holding them in a cryptocurrency wallet. You can also trade cryptocurrency CFDs.
A contract for difference (CFD) is a derivative financial instrument that is a contract between a broker and a trader. Under it, the broker agrees to pay the trader the difference in the value of the underlying asset at the time the contract is opened and closed. You can either go long if you think the price of the asset will rise, or go short if you think the price will fall.
For example, when trading Bitcoin CFDs, you are speculating on the price movement of the BTC/USD cryptocurrency pair. Unlike futures, CFDs do not have a set expiration date.
There are important differences between buying cryptocurrency and trading CFDs on cryptocurrency. CFDs are not usually used for long-term investments due to the overnight fees.
When buying cryptocurrency, you store it in a wallet, but when trading CFDs, the position is held in your trading account, which is regulated by financial authorities. When trading CFDs, you have more flexibility because you are not tied to the underlying asset, but simply buying or selling a derivative contract.
Spot Trading
Spot trading of cryptocurrencies is the buying and selling of coins and tokens on an exchange at the current market price. While some investors may focus on “holding” or storing cryptocurrency for an extended period of time before selling, a spot trader focuses on short-term transactions and sells an asset when its price moves up.
Spot cryptocurrency trading on exchanges, unlike CFD trading, does not give traders access to leverage. Additionally, spot traders own the cryptocurrency directly rather than trading derivative contracts.
Futures and Options
Futures are derivative contracts that obligate a trader to buy or sell an asset at a set price on a specified date in the future. Cryptocurrency futures contracts are traded on cryptocurrency exchanges. Bitcoin futures can also be purchased on the Chicago Mercantile Exchange (CME). They allow a trader to speculate on the price of certain cryptocurrencies without actually buying them.
Options are another form of derivative that give a trader the right to buy or sell an asset at a certain price. Unlike a futures contract, which obliges a trader to buy or sell an asset, with options, traders are not obligated to buy or sell and can act at their own discretion. A contract to buy is known as a call option, and a contract to sell is known as a put option.
If a trader expects the price of Bitcoin to rise, they can buy a call option and make a profit if their prediction comes true. If a trader expects the price of BTC to fall, they can buy a put option and make a profit if the cryptocurrency actually does fall. Remember that the price of Bitcoin is extremely volatile - it can unexpectedly change direction against your expectations and cause losses.
Exchange-traded funds (ETFs)
Cryptocurrency exchange-traded funds (ETFs) track the price of one or an entire basket of cryptocurrencies. Shares of ETFs can be purchased on stock exchanges. Their value fluctuates during the trading session.
The first Bitcoin ETF was the ProShares Bitcoin Strategy ETF (BITO). It was launched on an exchange in the United States in October 2021 after receiving approval from the US Securities and Exchange Commission (SEC).
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