Cryptocurrency Trading or CFD - What is More Profitable


Bitcoin Trading

Bitcoin trading has become very popular today, especially among day traders and technical analysts. And this is because there is a widespread belief that Bitcoin and crypto-currencies in general are more volatile and more suitable for technical trading, as opposed to classic markets. Classic markets such as stocks and currencies are believed to have been more volatile in the past, but because of the increased use of algorithmic trading, traders now feel that most volatility is now gone, and that is no longer possible to trade these markets. At least not through their own methods, that they once used. Algorithmic trading, implemented by large banks and institutions is said to have taken away all the opportunity, out of day trading, in all markets, except the crypto-currencies. That’s why so many day traders today are focused on day trading Bitcoin and other crypto-currencies. In reality, there’s no evidence of this, in my opinion it is still well possible to make money by trading CFD contracts on any classic market, stocks, indices, currencies etc. Bitcoin is more suitable for some trading strategies, while CFD trading on classic markets is more suitable for other strategies. As far as liquidity goes, the forex market is more liquid than Bitcoin, and as far as longer term value is concerned, Bitcoin has more potential for upside movement, but even that is not of much help to Bitcoin day traders. Day traders use technical tools, they simply believe that algorithmic trading has not taken over Bitcoin yet, and that this market obeys technical analysis much more than any other market, and that things will remain that way for some years to come.

Bitcoin trading will not very differently than trading any other market, however because it’s new, it has attracted mostly inexperienced day traders. These are traders who no longer can make money in the classic financial markets. So it’s their fault, and after few years algorithmic trading may take over Bitcoin too, so their day trading strategies are to blame for their failures, not the markets themselves. Many traders today, do make money trading all kinds of markets through CFDs. And they simply use more fundamental tools on classic markets, but they can still trade Bitcoin also, it’s not that different to some classic markets. Bitcoin is simply newer, less liquid and more volatile. In any case, I strongly believe that trading classic markets such as commodities or currencies, through CFDs, is absolutely possible today, and profitable strategies have not been affected by algorithmic trading, volatility is still around! And there are commodity and forex traders who make millions. I therefore don’t buy into this argument that day trading will work better on crypto-currencies than it will on classic markets. All markets can offer different kinds of profitable trading. It’s just that Bitcoin is more volatile and prone to surprise moves, and the other crypto-currencies that have appeared, are even more volatile. Bitcoin has gone parabolic in recent months, and this would suggest an inevitable correction to the downside, however nobody really knows if this will happen, it may just stabilize and simply continue in this parabolic trend, for more months to come.

Ethereum Trading

Ethereum is another crypto-currency which is taken more seriously than Bitcoin, and is by far the largest competitor of Bitcoin. It uses better, more sophisticated methods for validating online transactions, and is considered to be safer than Bitcoin, but is still way too volatile from time to time and not suitable for serious day trading or any kind of leveraged trading. It’s more suitable for long term investing. Moreover, there is a potential risk for Bitcoin, after Bitcoin split into Bitcoin and Bitcoin-cash, in that regard it may be safer to make long term trades in Ethereum rather than Bitcoin because this is what can happen: If Bitcoin keeps on rising, Ethereum will follow suit, but if Bitcoin drops because of the Bitcoin-cash upgrade, or any other reason, Ethereum will not go down as much, or it may even benefit from Bitcoin’s upgrade. Be sure not to confuse Ethereum with Ethereum Classic, which is a different crypto-currency and has nothing to do with Ethereum! In any case, I do see Bitcoin being the crypto-currency of choice for all big amount transactions, they are slow and painful, but good enough for large money transfers. Ethereum is closely behind, therefore the market is always there, how traders will trade them in a speculative way, is another matter. Ethereum trading is quite interesting, it can be done in various ways, most traders invest and watch price against the US dollar, but when they trade they actually have two markets, one is quoted in USD, the other is quoted in Bitcoins, so it’s effectively how much Ethereum is worth relative to Bitcoin. Ethereum trading can work at a basic level using simple technical analysis on all these related markets. Just bear in mind that paired markets are less volatile, and Ethereum / Bitcoin is even more interesting as the US dollar factor is taken out.

Ethereum trading appears more stable, less volatile than Bitcoin at this time, Ethereum appears bullish for the coming months, and even more bullish appears the Ethereum / Bitcoin market.

Litecoin Trading

Litecoin is another competitor of Bitcoin, and it was designed to offer greater transaction speed and lower dealing costs. It follows in the path of the other two crypto-currencies, and it’s actually taken very seriously by investors and industry specialists. It is expected though to be even more volatile than both Bitcoin and Ethereum, for more years to come. Litecoin is a really competitive crypto-currency that fills gaps which Bitcoin didn’t fill, so it is needed and it is here to stay and grow. Moreover you should study correlation patterns among the top 3 crypto-currencies and see how to mitigate trading risks, by hedging one market’s risk with a trade on another market. So all these 4 digital currencies can be used in a single trading strategy! Litecoin trading bring more trading possibilities and more ideas to mind. For the near to medium term though, Litecoin trading appears to be locked in range, at least the Litecoin / Bitcoin pair market is. When this market finally breaks out, to the upside, you can easily expect it to double in value, in a matter of few months.

Litecoin chart: In terms of USD price (green graph), I don’t see any potential for a rally, in the coming months. As far as price in Bitcoin is concerned (orange graph), I do see great upside potential over the next few months.

Dash Trading

All competitors of Bitcoin offer some advantages, especially on the issue of transaction speed, where all major competitors mentioned here, are better than Bitcoin, and Dash is one of them. Dash is expected to be widely used, because it will be widely accepted and it will be the most user friendly crypto-currency of them all, so together with the other 3, they will be all the crypto-currencies you will ever need to invest to, or trade. Trading these crypto-currencies on the major exchanges can be done in various ways, mainly you trade either a crypto-currency against the US dollar, or you trade one crypto-currency against another, this is known as pairs trading, and it helps reduce undesired volatility. Dash trading is too more interesting when looking into the Dash / Bitcoin market, rather than the Dash / USD market.

If Bitcoin corrects fast and deeply, it will send all these markets not just Dash, much higher, but it won’t be sustainable for too long as Bitcoin will sooner or later recover. For the coming months I do see a stable to slightly higher Bitcoin, where volatility will be reduced and tighter trading ranges, acting as consolidation price zones, will likely dominate the Bitcoin market. In that regard I suspect that Dash / Bitcoin will keep on rising too, so as to complete a symmetry pattern together with the first leg of the rally, marked in green on the above chart. So Dash trading for the Dash / Bitcoin pair,  for the coming weeks and few months, should take out the previous high whilst moving higher, but moving much higher and too fast, above that all time high, will result in an unstable uptrend, where a long trade may be caught on the losing side, just like that. As a rule of thumb, always pay attention to the daily chart, and watch for the pair in question to have a stable trend. A good up trend, should rise steadily, at about 45 degrees. All crypto-currency pairs have stable trends, if they rise or fall at around that angle, on the daily chart. This doesn’t apply to Crypto-currencies quotes in USD. Only to pairs, and any trend angles that are steeper or smaller than 45 degrees, are likely to lead to early reversals.

Future of Crypto-Currency Trading

Crypto-currency day traders do see great benefits in trading, because they gain access to market insights, through the crypto-currency exchanges. These insights include the live order book, which works very similar to how level II quotes work for the stock market, you get to see Buy and Sell orders, and you can infer where real support and resistance is at that time. Stock traders use level II quotes to do this, is not a new idea, and they trade the stocks through the super-liquid CFD market. I do believe that there’s great potential in this day trading method, where by analyzing live order book action, day traders can figure out the direction of a crypto-currency in the next few minutes to 30 minutes. I believe this is possible because it’s already proven to work with CFDs and level II stock quotes. With crypto-currencies it will be even more exciting because you can do pair analysis, and advanced hedging trades at the same time.

On the big picture, crypto-currencies will stay and grow, and all these different crypto-currencies mentioned here will be successful, since each one is slightly different than the other, and they all come together to fill the needs of the market. Simply put, Bitcoin will be a slow service, for very large amount of money, Dash will be very fast and user-friendly, used for small amounts of money, while Ethereum and Litecoin fall in between. There is a problem with security though, because even though they will never go down in value, so as to reach zero, and they will trade much like gold trades today, it will be possible for future hackers to steal and cash out your crypto-currency investment. Hackers of the not so distant future will have access to quantum computers, which can do in a few hours, what today’s computers need 100s of years to achieve.

Security and theft of investment is not a problem for traders though, traders simply trade spot price, so they take market risk, but they are not fundamentally prone to theft risk. The quantum computer hackers will only target crypto-currency codes worth millions, just like today’s top thieves who only steal from bank vaults, and only valuable items, and gold or silver traders are not affected. Even if someone steals $1million say in Bitcoins, the owner of these coins will be at a loss, but the coins will make it back to the market, the market price will not be affected overall.

Finally, you should keep the concepts of investing and trading totally separate, just because crypto-currencies will rise a lot, it doesn’t mean you should only trade on the long side. Traders should trade both sides of the market, and at least 2 different crypto-currencies. Pay more attention to the pairs quoted in Bitcoin, and not so much to the USD market. Because predicting the USD movements is much more difficult.

Their value in USD can be seen on the above table, Litecoin is the cheapest out of the 4 currencies we are interested in. While Dash, is believed to have the greatest growth potential for the coming years. Deep down, all the numbers should be checked against the US dollar, since we all deal in USD, but also do take into account how one crypto-currency does against the other.