Forex brokers, exchanges and wallets for trading cryptocurrency

2019.12.20 2019.12.20 Forex brokers, exchanges and wallets for trading cryptocurrency

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

Overview of the advantages and disadvantages of trading cryptocurrency with Forex brokers, on the exchanges, and storing your funds on the cryptocurrency wallets. Ways to trade according to a certain strategy

Today, investors can invest their money into cryptocurrency in at least five different ways. They include Bitcoin ATMs and Bitcoin futures as well. But the most popular ways are still cryptocurrency trading on the exchanges, in Forex, and keeping coins on the wallets. Exchanges are often hacked, wallets involve the commission fees and the transactions take longer time; however, Forex has a limited choice of cryptocurrencies and swaps. You will learn from this article about the advantages and disadvantages of each way of trading, as well as about which way suits different strategies.

Exchanges, wallets or Forex: what is the best to trade cryptocurrencies

In 2017, cryptocurrencies became the most profitable asset. However, the risks of cryptocurrencies turned out to be the highest among traditional and non-traditional investing instruments. Although, cryptocurrencies are not tangible, you can’t see the coins, or touch them, the rush demand for the coins resulted in the emergence of dozens of cryptocurrency exchanges, hundreds of wallets and exchangers. Moreover, even a separate industry of the graphic cards manufacturing appeared, special graphic cards for cryptocurrency mining. Forex brokers also joined this trend. They enlisted into their assets a new non-standard instrument. Although forex traders prefer common assets (currency pairs, metals, securities), they gradually become more interested in cryptocurrencies, being attracted by their yields. Read on about the ways to trade cryptocurrencies, their advantages and disadvantages.

Ways of trading cryptocurrency

Today, traders can buy cryptocurrency almost everywhere, from exchanges and exchangers to Bitcoin ATMs. Although ATMs offer only bitcoins, buying BTC there, followed by crediting to your card, will take ten minutes the longest, without any verification or hack risks.

There are several options for trading cryptocurrency:

• Futures. In December, 2017, two U.S. largest exchanges, CME (Chicago Mercantile Exchange) and CBOE (Chicago Board Options Exchange), launched futures trading for Bitcoin, and so, confirmed BTC status a full-fledged financial instrument;
• Cryptocurrency exchange. Trader registers an account on a cryptocurrency exchange, then, buys assets, making profits from selling them at a higher price in future;
• Wallet. Traders also make profits from cryptocurrency price changes, but they buy it through exchangers or on the exchange.
• Broker. Traders make money on cryptocurrency, working with a Forex broker.

The advantages and the drawbacks of each option will be described further.

1. Bitcoin futures

With the launch of Bitcoin futures, stock investors with large capitals got an opportunity to invest in cryptocurrency without a risking of losing their funds on unregulated cryptocurrency exchanges. Originally, even bitcoin rate decline was suggested because of dominating “bearish” capital, but, in fact, the launch had a weak influence on the rate. The problem with this way of investment is still a large initial deposit required, and the issue of taxation – official recognition of bitcoin as a payment means makes it affected by taxes. The second drawback is that you need to understand how CBOE, CME and futures work, as well as the rules of stock trading in the USA. Ordinary traders and long-term investors will understand cryptocurrency wallets and exchanges better.

2. Trading on cryptocurrency exchanges

According to Coin Market Cap, there are over 1,300 cryptocurrencies in the world, and their number is constantly growing. Each cryptocurrency is quoted on at least one exchange, and there are dozens of them. Large exchanges enlist quite lot of cryptocurrencies, you can buy them only after you have registered a wallet with the exchange. You can also mine cryptocurrencies on the exchanges. For example, Criptoria exchange offers exchange and mining of over 220 forks. Exchange forums enable to share opinions about possible moves of cryptocurrencies rates.

Another advantage of exchanges is that you can profit off of the different fork rates due to different trading volume on the exchanges (arbitrage). It means that you buy a cryptocurrency on one exchange, where its rate is the lowest, transfer it to another exchange, where it is more expensive, and sell it at a higher price. Although, there are less and less of these cryptocurrencies, and the transaction fees take quite a part of the profits, it is still possible to make money so.

The drawbacks of exchanges:

• risk of losing money. For example, the cases with MtGox and BTC-e. No regulation results in fraudulent action by the exchanges as well. Traders will hardly learn, whether it was a real hack, or the exchange initiated it itself. If there is a hack or any misconduct by the exchange, traders have no one to send a complaint to;
• no short positions. Traders can buy a cryptocurrencies, wait until it grows in price and then sell the coins. Exchanges don’t allow making money on the rate declining. Short position is a kind of giving a trader an asset on credit, that will be repaid after the position is closed. The exchanges themselves don’t work like this. Only some cryptocurrency exchanges (Poloniex, Bitfinex) are technically capable of borrowing cryptocurrency from other traders, without any guarantees;
• limited ability to work with fiat money. For example, one of the top exchanges, South Korean Bithump works only with South Korean won;
• difficulties with verification;

3. Storing cryptocurrency on wallets

Unlike exchanges, cryptocurrency wallets are relatively better protected; they are less often hacked, though it may also occur. However, for a less risk, compared to the cryptocurrency exchanges, traders have to pay commission fees; and the transactions will take longer time (it is about online wallets). Some traders prefer working only with wallets, not trusting exchanges, other ones use wallets for long-term storage. Cryptocurrency wallets are a trading tool, rather than a way of investing.

4. Trading cryptocurrency with a Forex broker

Unlike all the previous ways to trade, Forex suggests not a real asset, but a CDF (contract for difference). Traders don’t have any physical title of possession cryptocurrency, they make profits from their projections for where the price will move in future. But the principle of making money is the same: profits from the difference between an asset purchase and sales price.

Compared to exchanges and wallets, trading with a broker looks safer for several reasons:

• brokers are controlled by official regulators and independent auditors;
• the funds of a trader are held in segregated accounts (separate from the funds of a brokerage firm), in the banks of a global stature and spotless reputation;
• traders’ accounts are not so often hacked as the exchange wallets are;
• there are compensation funds that partially compensate for trader’s losses in case of broker’s negligence. For example, Financial Commission compensates up to $20,000.

Like cryptocurrency exchanges, brokerage firms go bankrupt from time to time. But, still, a broker with a 10-year working experience inspires more confidence than the newly-made exchanges. Although brokers sometimes have technical failures, exchanges suffer from them far more often, in the most inappropriate moments.

Advantages of cryptocurrency trading in Forex:

• the application of strategies is not limited. You can enter both buy and sell trades (brokers provide loans for traders). They allow hedging (opening two oppositely-directed positions at the same time);
• orders are executed immediately. Although, there are slippages in Forex as well, it is about a few seconds. On the exchanges, the speed of a trade execution depends on the commission fees paid by a trader; and the delays in transaction execution can last for a few hours. Forex provides an opportunity of scalping.
• it is possible to use trading advisers.

Despite the obvious advantages over the exchanges, Forex has some drawbacks:

• a limited choice of cryptocurrencies. If on cryptocurrency exchanges, there are dozens of cryptocurrencies enlisted, brokers mostly use only ВТС and ЕТН. The widest offered range include Bitcoin, Ethereum, Bitcoin Cash, Bitcoin Gold, Ethereum Classic, Ripple, Dash.
• However, there are brokers, offering far more options and a much wider choice of crypto assets and cryptocurrency pairs, though, there are quite few of them and they are rather rare. The launch of the other cryptocurrencies, at least from the TOP-20 list, is difficult to implement in technical terms;
• no opportunity of reflowing the funds. Exchanges and exchangers allow fast converting one cryptocurrency to another. For example, Dash into Stellar, Stellar into Monero, and so on. In Forex, you can only close the position for one asset and open for another one, spending money on spread;
• swap. The main reason why traders prefer exchanges. In the market, where volatility can reach 20-30% in one day, it is very important to be patient. It is important to wait out the period of decline until there is a period of growth. Brokers charge swap, that is a fee for holding the money until the next trading day. Exchanges don’t have weekends or days off, but brokers charge a double swap rate after the weekend.
• Stop-out. An opened position can be closed automatically by a broker, if a trader’s deposit decreases below the lowest allowed level. You can hold your coins on the wallet for as long as you wish, but when using the financial leverage, the deposit will be zeroed out before the cryptocurrency depreciates.

Conclusion. It is impossible to say for sure, what way of investing is better or worse. Each of them is appropriate for a certain situation:

• Exchanges suit those, who spend all day long in front of the computer, making dozens of transactions with different cryptocurrencies on different exchanges. Potential risks are covered with the amount of trading volume.
• Wallets will suit traders, who want to reduce the risks and trade with long-term strategies, expecting growth in the distant future. One can hold coins on hardware or cold wallets for years, provided blockchain is updated regularly.
• Forex will be of interest to those, who take profits from intraday strategies and save money on swaps, preferring a moderate risk. If a trader already cooperates with a broker, they don’t need to open an account on the exchange.

You can combine all the ways to diversify the risks. Share your opinions in the comments: what way of cryptocurrency trading seems to you the most appropriate, in terms of the risk, costs, and efficiency.

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