Digital currencies as financial instruments – Forex Trading Articles

Digital currencies are computer files that are stored in distributed databases that communicate over the internet. They can only be accessed or used through digital devices like computers or mobile phones. They have the same characteristics with traditional money except that they have no physical form, banknotes and only exist electronically. Cryptocurrencies, eCash, central bank digital currencies (CBDC) are some examples of digital currencies.

e-Cash

e-Cash was a digital currency founded by ‘Digicash Inc.’; an electronic money corporation that was founded by ‘David Chaum’ and implemented in 1990. e-Cash was tried by a US bank; ‘The Mark Twin bank’ in St. Louis, Missouri between 1995 and 1998. It was also available via several European banks but Digicash became bankrupt in 1998 and was acquired by ‘eCash Technologies’.

Central bank digital currencies (CBDC)

CBDC is a future technology where central banks issue, value and control digital fiat currencies. The concept is inspired by the success of Bitcoin but it is yet to be fully implemented by any country’s central bank. It will serve as a means of payment that can be uniquely identified and run on secured platforms. Its benefits include tax collection, crime prevention, financial safety, etc.
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Cryptocurrencies

A Cryptocurrency is a type of virtual currency that is created and stored on a decentralized database, secured through cryptography and not regulated or controlled by any central authority. The first cryptocurrency is Bitcoin which became available since 2009 and have gained popularity and value over the years. After Bitcoin, many other cryptocurrencies have been launched and are known as ‘altcoins’. Some popular altcoins are Ethereum, Ripple, Bitcoin cash, etc.

Virtually every cryptocurrency is created, stored and transferred in its own blockchain network. A blockchain is a database of transactions that is stored on every computer on the network. The records are time-stamped, protected through cryptography making it very difficult to alter. The process of adding blocks or new transaction records to the blockchain is called ‘Mining’. The miners use special hardware to confirm transactions and maintain the blockchain in return for the crypto tokens.

If you wish to invest in digital currencies, you can acquire it through mining, gift, payment or buying from a cryptocurrency exchange such as coinbase, Binance, etc. It is stored in wallets. There are digital wallets which run on computers or smartphones. You can also have paper wallets and hardware wallets. Most Crypto investors aim to buy low and sell high, e.g. Bitcoin investment yielded huge results for early investors who obtained the coins from 2009 to 2015 when the value was low.

Cryptocurrency Contract for Differences (CFDs)

Crypto CFDs are contracts where the trader only speculates on the underlying cryptocurrencies’ prices but does not own them. This means that the trader only predicts whether a crypto coin’s price will go up or down at a specified time. There is no need for crypto wallets because he does not own the crypto coins at any time. Cryptocurrency trading contracts are made with online CFD brokers who provide trading platforms where traders place their buying and selling orders. CFD brokers pair the cryptos with the most popular fiat currencies, e.g. BTCUSD, ETHEUR, LTCUSD, etc.

Trading digital currencies with T1Markets

T1Markets is a forex and CFD broker that is physically located in Cyprus but offers its services over the internet. It is the trading name of ‘General Capital Brokers Ltd’ which is an investment firm that is authorized by the Cyprus Securities and Exchange Commission (CySEC). T1Markets offers more than 30 crypto assets for trading on the MT4 trading platform.

Below is an outline of how to trade cryptocurrency CFDs with T1markets:

Click on ‘Sign up’ and fill the account opening form.
Upload your ‘Know your customer’ (KYC) documents.
Using the most convenient deposit option, transfer your trading capital.
When the account is approved, choose the MT4 version of your choice.
Login and place either a ‘buy’ or ‘sell’ order for the crypto of your choice.
Close the trade whenever you are satisfied with the results.

Advantages of trading Crypto CFDs

Safety

The buying, storing in wallets and selling of digital currencies via exchanges is very risky for a few reasons. Exchanges are frequently attacked by internet hackers and many of such attacks result in loss of the crypto assets. Other investors have lost their cryptos due to hardware or software failure of the device in which the digital coins are stored. When transferring cryptos, any mistake in the wallet address of the receiver may result in permanent loss of the coins.

But, trading crypto CFDs eliminates all these problems because the traders do not own the assets and the contract terminates when the trader closes his trade. All orders are cash-settled immediately and the trader can initiate a withdrawal at will.

Multiple access

Unlike most markets, several crypto CFDs can be traded simultaneously from the same brokerage account with the same invested capital. For e.g. if a trader opens a T1Markets account, he can speculate on BTCEUR, XRPUSD, ETHGBP and other cryptos by opening all the trade positions at the same time so long as he has enough margin to cover all the trade positions.

Lower start-up capital

Crypo CFD traders require much lower trading capital when compared to other investors who choose to buy and hold the digital currencies. The low capital is made possible by leverage trading; a tool that allows crypto CFD traders to open trade positions that are multiples of their trading capital. For example, on a leverage of 1:5, a trader can open trade positions worth $10,000 with a deposit of $2,000. The leverage available to traders is decided by the brokerages.

Trading time

Crypto CFDs can be traded on any day and at any time. Since there is no issuing or controlling authority regulating the market time or price, it is traded on a 24/7 basis including weekend and public holidays. This is good news for a trader as he can choose to trade at his convenience; full time or part-time.

Disadvantages

Leverage risk

As earlier stated, crypto CFDs are traded on leverage which enables traders to control large trade positions with small deposits. Unfortunately, leverage trading increases the risk because it not only magnifies opportunities to grow the invested capital, it also magnifies losses when the trade goes against the trader.

Market risk

The price of cryptocurrencies are largely volatile because of many reasons including market forces of demand and supply, competition among the coins, exchange attacks, government policies, crypto news, etc. The volatility makes the cryptocurrency market inherently risky because it can reverse against the trader’s position causing losses.

Fees

CFD brokers charge for their services. These charges vary from broker to broker and may include spread charges, commissions, deposit/withdrawal fees, swap fees, inactivity fees, etc. Some brokers charge a flat commission on all trades but most of them charge from the bid-ask spread. When a trader leaves a trade position overnight, swap fees are charged by the broker.

Summary

Digital currencies are equivalent to money in electronic form. Cryptocurrencies are the most common form of digital money available today. Virtually every crypto coin is created, transferred and maintained in its own blockchain network which is a secured database of all transactions recorded on all the computers in the network without any central control. Crypto CFD trading does not require huge capitals, need no wallets to safeguard and can access multiple markets at the same time.

However, high risk is involved, the volatility is high and traders can easily lose their invested capitals.

T1Markets is regulated by CySEC and it operates from Cyprus. The broker offers 350+ various assets for trading. The platform available is the MT4 which is used by millions of traders all over the world. It is available as WebTrader, iOS and android app as well as windows desktop application. The broker offers tight spreads on all assets and do not charge extra commission. Trade execution is very fast. T1Markets supports its clients with daily market news, trading signals and a comprehensive trading academy comprising of several video tutorials, training articles and eBooks.

FAQs

How much should I invest in digital currencies?

The amount you wish to invest should depend on the following:

Total amount available to you and your risk appetite.
Your investment knowledge, skills and experience.

If you are a newbie, you should only risk what you can afford to lose. Whatever you decide, always bear in mind that whether you are buying in wallets or cryptocurrency trading in CFDs, you are taking a huge risk and might lose your money.

Will digital currencies replace paper money?

If it will happen in the future, then, it will still take a long time. Bitcoin has been in existence for over a decade, yet it is very much unknown in many parts of the world. People are used to fiat currencies and prefer to use cash or debit/credit cards for their purchases and transactions.

Can digital currencies be stolen?

Of course, many crypto owners have lost their assets to hackers. According to Bloomberg , Binance, a leading crypto exchange lost 7,000 Bitcoins worth $40 million to hackers in May 2019. Also, if your wallet’s private key is compromised, then your digital tokens can be stolen.