The cryptocurrency market continues to become legitimate. Over the past 12-months, several companies announced they would accept s cryptocurrencies as payment for merchandise. For example, PayPal users in the U.S. can buy, sell and hold select Cryptocurrencies directly through PayPal. The service was then added to Venmo in 2021. Tesla also announced during the past year that they would accept bitcoin. They also made a 1.5-billion dollar investment into bitcoin.
Cryptocurrencies have developed into a new asset class. This asset class is a grouping of investments that exhibit similar characteristics and follow specific laws and regulations. Asset classes are constructed by creating instruments that often behave similarly to one another. Cryptocurrencies are decentralized currencies. A government or central bank does not control them.
In many cases, such as bitcoin, there are a finite number of digital coins that can be created. Many of the cryptocurrencies are generated on a blockchain. A blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, contains a record of every time someone sent or received bitcoin. The blockchain technology that drives specific cryptocurrencies makes it possible to transfer value online without an intermediary like a bank. With the cryptographic nature of these networks, payments via blockchain can be more secure than standard bank transactions. You do not need to provide sensitive information like your name, address account number. This process eliminates most of the risk of your financial information being compromised or your identity being stolen.
Digital Currencies Can Be Volatile
Cryptocurrencies can be used as a payment method, as well as an investment vehicle. One of the criticisms of cryptocurrencies as a digital payment mechanism is that they are volatile than sovereign currencies. Many vendors are concerned that the whipsaw price action seen in cryptocurrency can generate gains or losses overnight. Tesla accepts bitcoin but has told customers they only have a 30-minute window to provide them with payment once they are given a quote which is likely due to the volatility of bitcoin.
How Do You Trade Cryptocurrencies?
The volatility of crypto trading makes them good investment candidates. Traders generally thrive on volatility as it provides an opportunity to generate gains as the security moves up and down. The volatility in many cryptocurrencies allows you to purchase and sell them through several types of instruments. You can trade using a product like PayPal or use an exchange like Coinbase. These platforms allow you to buy and sell cryptocurrencies and enable you to send your cryptocurrencies to vendors in exchange for merchandise, including goods and services. If you plan to use cryptocurrencies as a payment mechanism, you might consider using a platform that provides you with a digital wallet.
There are several alternatives to trading cryptocurrencies via a digital wallet. When you use a digital wallet, you receive cryptocurrencies from another digital wallet or purchase them through an exchange with a digital wallet. The alternative is to use a brokerage account to buy a security that tracks the movements of cryptocurrencies. Two of the more popular securities that track the movements of cryptocurrencies are ETFs (exchange-traded funds).
Stock Like Cryptocurrency Assets
Exchange-traded funds are stocklike products that track an index, sector or cryptocurrency that can be purchased or sold on a stock exchange. An ETF can hold any asset or track any asset from an individual currency pair to a cryptocurrency. ETFs can use specific trading strategies in addition to having certain assets.
For example, one of the more popular cryptocurrency funds is the Grayscale Bitcoin Trust. This asset holds bitcoin and therefore tracks the movements of bitcoin. The bitcoin is stored in offline or cold-storage with Coinbase Custody Trust Company. The Custodian is a fiduciary in the United States under the Investment Advisers Act of 1940, as amended. Grayscale offers several different types of investment vehicles that are related to cryptocurrency.
Contracts for Differences
Another type of asset often used for trading cryptocurrency is a contract for differences (CFD). A contract for differences is an asset that tracks the movements of a cryptocurrency. In this case, a broker will provide a tracking device and benchmark the movements to either an index or an exchange cryptocurrency such as Coinbase.
There are several benefits to trading using contracts for differences over a digital wallet or an ETF. The most glaring advantage is that you can use leverage. Leverage is using borrowed capital that is collateralized by your securities. In some cases, the leverage on cryptocurrencies is as high as 10:1. The leverage you use with a CFD broker is similar to the leverage you can attain when purchasing a house. The collateral is the CFD as opposed to a home. The only significant difference is that the mark to market of your CFD declines below your equity; your broker will ask for more money, referred to as a margin call.
The Bottom Line
There are some similarities and differences in the products that are available to trade the cryptocurrency market. The similarity is that all these products track the movements of the underlying cryptocurrency. If you plan to invest in cryptocurrency and plan to use your cryptocurrency to make payments for goods and services, your best bet is to open an account at an exchange or PayPal. An exchange will allow you to buy, sell and store your cryptocurrency using a digital wallet.
If you don’t plan to use your cryptocurrency as a payment mechanism, then you are better off using an ETF to trade or a CFD. Both of these products track the movements of the underlying cryptocurrency. The general difference is that you will get more extensive leverage if you use a CFD, which will allow you to enhance your returns at a greater rate than an ETF.
Author: Amit Kumar
Amit is the founder of YoursNews. This is a next generation blog, proved that blogging is an art; focus on valuable ideas and genuine stories, rest everything will fall into place.
