New to Trading?
Below are the three ways you can trade Bitcoin:
1. Buy the underlying from an exchange or online cryptocurrency broker (holding the actual currency in a wallet at the exchange or off-site)
2. Trade (buy/sell) a derivative and hold cash margin with OASIS PRO.
3. Buy a publicly listed security related to Bitcoin and hold shares with OASIS PRO.
Buying the Underlying (Actual) Asset: Pros and Cons
Taking the first option listed above, which is to buy the underlying, you become the direct holder of the digital asset. Upon purchase, the cryptocurrency is sent to your bitcoin address or account (wallet) with the exchange. From there, you can transfer the crypotocurrency to any bitcoin address or wallet address using your private key that verifies you control ownership of the asset.
This responsibility to safeguard your private key which controls the digital asset also comes with some additional risks, as explained below. First, we will go over the positive sides of owning the underlying digital asset.
Trading Bitcoin as a Derivative: Pros and Cons
Trading a derivative on Bitcoin negates the responsibility to safeguard any private keys.
Greater degree of leverage is usually offered on derivatives, so your cash margin can have more buying power (increased risk/reward).
Derivatives permit shorting by opening a selling position without first having a long (buy) position, for those looking to speculate on a decline in prices of the underlying.
Brokers may be able to offer lower transaction fees, although spreads may be slightly wider or marked up, depending on the liquidity sources the brokerage uses.
Spreads (trading cost) are usually wider compared to trading the underlying.
Trades may be cancelled or reversed in the event the broker finds fault in its systems (price, etc.) or if it finds a client violates their particular account agreement with the said broker (agreements vary).
Clients rely on the creditworthiness of the online broker for managing any risk prudently and ensuring that it is well capitalized (less risk of going defunct).
Margin trading means there is a chance of a negative balance occurring in the case of huge market volatility, a gap, or other material systemic event.
In such cases, counterparty risk falls on the broker, which means if the broker declares bankruptcy, investors may suffer substantial losses and not receive priority among creditors.
Buying Bitcoin-Related Securities (ETFs, ETPs, etc.): Pros and Cons
Trading a Bitcoin-related security that aims either to replicate the performance of the asset or act as a trust that holds Bitcoins where investors don’t need to hold private keys provides traders an alternative investment vehicle to buy and hold (long only).
Doesn’t require safeguarding private keys
Trades as a publicly listed security on exchange under exchange guidelines.
The price of the security and the price of the underlying asset (Bitcoin) may vary, causing a tracking error, either due to fees or other differences in the portfolio construction methodology.
The security may only be tradeable during exchange hours, and not 24 hours a day as is the case with Bitcoin.
Volume of the traded security may be less than the available volume of the underlying asset (making it illiquid).
Bid/ask spreads and other fees may be different than the cost of buying the underlying directly.