Jan 31, · When it comes to investing in Bitcoin, there are a few risks investors need to be aware of: Regulatory Risk. Probably the biggest risk to the future success of Bitcoin as . Short-selling bitcoin is a common hedge against a long exposure, whether this is a bitcoin holding or a speculative trade. If you already own bitcoin, but believe it is due to fall in the short term, you might decide to reduce your exposure by opening a short position on the cryptocurrency at the same time. Jul 29, · Hello pas Thank you for your question. The major risk of bitcoin trading is capital loss. Bitcoin and all other cryptocurrencies are known to .
Trading bitcoin risk5 Things to Know Before Investing in Bitcoin ( Updated)
Those who take a more conservative view of trading , including many traders, see something like bitcoin as having qualities that are simply too inherently risky, and given how much it can still move, this is understandable. We can define the risk of a trade however we want, including setting it as a very small percentage of the overall value of our position.
This does not mean of course that the trade would always be held to hit these stops, as there are other factors that may influence how long we stay in it, the movement of technical indicators for instance. When we define our risk by setting such a maximum percentage loss, this just means that this is the most we are prepared to lose with it. The trick to all this though is to manage risk properly while still striving for acceptable returns, although sufficient risk control is an absolutely necessary component of this, and that part needs to be seen as unalterable.
Coming up with a profitable trading plan independent of risk is essential, and at some point, every trader who is going to last very long needs to achieve this.
Trading bitcoin is similar, especially now that its volatility has calmed down, and in spite of it being still very volatile, this can be managed if approached correctly in the same way that futures trading can be managed by skilled traders. The level of skill with bitcoin trading is higher though, due to its spreads being nowhere near as desirable as you can get with futures trading or through a good contracts for difference broker.
These larger spreads impact both the challenge of coming up with a profitable system and the amount of risk involved. When we are behind more when we enter the trade, this amount is added to the risk of the trade from the outset. So, larger spreads affect both, and both of these elements affect the degree of risk in the trade, as when we make less there is more risk for drawdowns as they are not being offset as much.
We always need to not only test our ideas out prior to putting real money on the line, we need to make sure that trading a certain asset like bitcoin delivers good enough results over whatever else we may be trading instead to make sense of trading bitcoin.
If we can achieve this, and if we can manage the risk well enough, trading bitcoin can indeed prove worthwhile. Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean. These include:. However, for those keen enough to learn, there are ways to reduce the risk you take on, at least to a known amount.
This is where risk management tools, such as stop-losses, and strategies, such as hedging come in. Hedging bitcoin, or any cryptocurrency, involves strategically opening trades so that a gain or loss in one position is offset by changes to the value of the other position. However, hedging is seen as a useful strategy for traders who want to maintain their original bitcoin holding but create a neutral exposure.
There are a variety of ways to achieve a cryptocurrency hedge, but three popular methods are:. Short-selling in general is the practice of taking a position to sell an asset, believing that it will fall in value and you can buy it back for a lower price — profiting from the difference. Short-selling bitcoin is a common hedge against a long exposure, whether this is a bitcoin holding or a speculative trade. If you already own bitcoin, but believe it is due to fall in the short term, you might decide to reduce your exposure by opening a short position on the cryptocurrency at the same time.
This way, if the market falls, you can cover some of the loss to your initial position with gains on your short position. The traditional method of short-selling would involve borrowing bitcoin from a broker or third party, selling it on the open market, and then returning the coins to their owner.
There are a few cryptocurrency exchanges that facilitate short-selling, but it can be difficult to find a third party that is willing to lend you the asset.
Even if you do find a willing lender, they are able to recall their asset at any time — this could mean you would have to buy the coins back for a much higher market price. One of the most popular ways to hedge bitcoin is through CFD trading. As derivative products, you would not be required to own the underlying cryptocurrency in order to open a position. This means that you can speculate on the price of bitcoin without ever having to worry about opening an exchange account or digital wallet.
Another benefit of derivatives is that you can take advantage of markets that are falling in price as well as those that are rising — essentially, they enable you to short-sell without having to borrow bitcoin. This is a particularly important feature for hedgers, who need to be able to protect themselves against declining assets. There are plenty of strategies that you can implement using derivatives but one of the most popular is direct hedging. This involves taking two positions on the same cryptocurrency, at the same time, but in opposite directions.
Rather than selling your bitcoins, you decide to hedge against them. You open a CFD trade to short bitcoin.
Once any negative price movement is over, you could close your direct hedge, and the profit to the CFD trade would offset the loss to your cryptocurrency holding. Futures are a type of financial contract in which two parties agree to trade an asset, in this case bitcoin, at a predefined price on a specific date in the future.
Bitcoin futures are seen as providing a legitimate way for market participants to lock in a market price. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument.
IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.
Our guide to investing in Bitcoin will help you open an account, add your funds and make your first purchase. Learn how to trade cryptocurrency whether you're a beginner or advanced trader. Our how-to guide provides simple instructions. Learn what it means to mine Bitcoin, how to do it, and a list of the best Bitcon mining software for casual miners and professionals alike.
Benzinga's financial experts go in-depth on buying Ethereum in Read, learn, and compare your options to make the best investment. Check out our guide on how to buy Bitcoin cash and get statrted. Beninga's financial experts detail buying bitcoin with your PayPal account in Read, learn, and compare your options for investing.
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