Is Bitcoin the best instrument to trade?

Bitcoin (BTC) is a virtual currency, using encryption algorithms and priding itself with anonymity of transactions and low fees. Since its development, back in 2009, it managed to rise from 20-30 USD, to over 580 USD for one BTC, nowadays. This huge increase also attracted traders interested to gain from the fluctuations. But how profitable really is the BTC trading?

Let’s start with one characteristic that impacts significantly the trading process: liquidity. Or the lack thereof. While not being controlled by any central bank or authority, the bitcoin is not that liquid, and the actual amount of BTC is limited. It reached, now, some 15 millions, with an expectancy to get to 21 million in several decades. This low liquidity is the root of all evils, but most of all, it brings high volatility. A small amount of BTC sold over less significant business news can move the value downwards, or in return, a buying spree can up the value without a concrete reason. In an attempt to go around the lack of liquidity, and maybe limit volatility, exchanges came up with a palliative solution: BTC holders can, let’s say “borrow” them to those in the market who want to trade BTC, but do not have enough. The borrower pays back the borrowed amount at a fix date and with a specific interest.

Not many leveraging solution

Moreover, if other markets allow you to leverage your positions, the BTC trading is rather poor in such solutions. The system is quite limited. For instance, hedging is somewhat restricted to miners – those who keep track of BTC and add them to the block chain. Thus, the main characteristic of a futures contract, for example, is blocked: in order to hedge against potential losses, you need for others to continue trading. But if no one else does, then your contract is useless, and you need to keep it until trading picks up. Not a good opportunity in a low liquidity market.

More profitable investment options in stock exchange

Under these circumstances, you may need to look elsewhere on the market for your trading needs. For instance, a better solution than trading BTC would be contract for difference (CFD). Let’s take CFD on shares. CFD is an instrument that follows a certain asset, in this case, a share. The CFD holder does not have to buy the actual shares, but the contract that allows him to cash in if the respective shares go up. This instrument offers high leverage. Depending on the broker, you CFD may come with stops or limits. And maybe some very important features: no trading fee with the brokers and no expiring date. For instance, a 5% margin to start a trade, let’s you cash in 100% ROI provided the respective share increases by 5%. And with a huge market such as the stock exchange, the opportunities are considerably higher compared to BTC trading. And with lower capital.

All in all, the bitcoin trading can offer some investment opportunities, but it also limits the options. The lack of liquidity is a major setback in the evolution of this digital currency.

mm – leading Bitcoin News source since 2012

Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.