How to Invest in Cryptocurrencies?

crypto

There are several ways to invest in cryptocurrencies. Its no longer necessary to open an account that has a specific crypto-currency-address that allows you to store your cryptocurrencies safely.

Today several different securities track the movements of cryptocurrencies and make learning how to trade cryptocurrency a more efficient process. The most popular securities that track the movements of different cryptocurrencies are contracts for differences (CFDs), futures contracts and exchange-traded funds (ETFs).

What if I Plan to Spend Cryptocurrency?

Cryptocurrencies such as bitcoin and Litecoin are payment processing cryptocurrencies that can be used to buy goods and services. If you plan to invest in one of these cryptocurrencies but also plan to use these currencies to pay for goods and services, you need to open a cryptocurrency account. This is an account where you could physically store your cryptocurrency using a specific address for each cryptocurrency you hold. This means that you need multiple accounts to hold multiple cryptocurrencies. Each would have a unique address. Most of the exchanges that offer physical cryptocurrency accounts will not offer leverage.

Using Contracts for Differences

If you do not plan to use cryptocurrencies to purchase and sell goods and services, an alternative investment method would be to use contracts for differences (CFDs). A CFD is a financial instrument that tracks the movements of different cryptocurrencies. Most forex brokers that offer CFDs that track cryptocurrencies offer several different versions. Some track cryptocurrencies versus the dollar or another fiat currency such as the Euro. Other CFDs track the movements of cross cryptocurrencies such as bitcoin versus Ethereum. Additionally, CFDs employ the use of leverage through a margin account. A margin account allows your broker to use borrowed capital to enhance the amount of capital you can control using a CFD. For example, with $100 you can control $1,000 of cryptocurrency with the use of a margin account.

What is Leverage?

Leverage allows you to use borrowed capital to enhance your returns. This enhancement is embedded in a CFD contract. For example, assume you want to purchase $1,000 of bitcoin. Your broker will ask you to post $100, which will allow you to control up to 10-times the notional value you would normally trade. This will also allow you to enhance your returns. If you make 5% on your trade $1,000 * 5% = $50, your return will be 50% on the capital that you use to place your trade.

Using Futures Contracts

An alternative to CFD trading of cryptocurrency is a futures contract. Futures are the obligation to purchase an asset at some point in the future. Futures contracts that track the underlying movements of cryptocurrencies expire on a given maturing date. This means that you need to either sell your contract before it expires or roll it to another contract (sell the contract you hold and buy a deferred contract). Futures contracts offer leverage. The leverage offered by futures brokers is based on a margin account.

Using an Exchange Traded Fund

A third alternative is to use an exchange-traded fund. An exchange-traded fund holds assets such as stocks, commodities, or cryptocurrencies. Traders who issue ETFs will buy and sell assets to keep the ETF near its net asset value. An ETF that holds cryptocurrency will attempt to track the movements of the underlying asset. Generally, most ETFs do not employ leverage.

The Bottom Line

The key takeaway is that there are
several alternatives to using a physical cryptocurrency account to
invest in cryptocurrencies. If you do not plan to use
cryptocurrencies to purchase goods and services, there are
alternatives such as CFDs, futures contracts and ETFs that are better
designed as investment vehicles. Some of these assets, such as CFDs
and futures contracts employ leverage allowing you to take advantage
of additional capital to enhance your returns.