How to Invest in Cryptocurrencies: The Complete Guide for 2020

Seasoned investors continue to cross over from the more mature asset classes and regulators have eased off on the Crypto assault that led to the 2018 slump.

With Bitcoin and the broader market sitting at more than 50% below their all-time highs, there is still plenty of incentive to enter the crypto sphere.

For many, however, the crypto market may seem like a maze. There are a tremendous number of exchanges and brokers and that is before considering regulations imposed by regulators in recent years.

Investing in cryptocurrencies requires a level of due diligence not too dissimilar to the research involved in other more mature asset classes.

The volatility and sizeable returns on offer have certainly allowed investors to dream. After all, Bitcoin has yielded a mass number of Bitcoin millionaires, more commonly known as whales.

So, how do we invest in cryptocurrencies?

While there are multiple considerations, some are more important than others when looking to enter the crypto market.

Just jumping in on a whim that the majors will reach historical highs is a dangerous game. This is no dissimilar to jumping into the equity markets when they are sitting at record highs.

There is one material difference, however. The regulatory landscape has materially changed since late 2017. For this very reason, investors may continue to face plenty of uncertainty before the market can find a return to the hay days.

Understanding the key drivers and market characteristics are therefore particularly important.

Basic Essentials

In this guide, you will learn the key preparations that you need in order to build your cryptocurrency portfolio.

Before making an investment, deciding on the source of funds would certainly be step 1.

In spite of the current interest rate environment, it is recommended that you avoid funding the portfolio with debt.

Credit Card or Bank Account – Investors will, therefore, need to decide on cash or credit card. As an investor, you can either fund your crypto trading account with a debit/credit card or by funding with a bank transfer.

It is worth noting, however, that certain jurisdictions have banned the funding of crypto exchanges with credit cards. Some banks have even taken a step further and banned the transfer of fiat money to such exchanges.

Nonetheless, the simplest method to fund a crypto exchange account is with a credit/debit card. This does tend to come with higher fees and caps on transfer amounts, however.

Fiat to Bitcoin Exchange

First, you need to decide on which cryptocurrency or cryptocurrencies that you wish to trade.

You would then need to identify the exchanges that have the largest trading volumes for the chosen cryptocurrencies.

One consideration here is your source of funds. Not all exchanges allow fiat money deposits. A vast majority of exchanges restrict deposits to Bitcoin.

Carrying out the necessary research on the most appropriate exchange is important. If you are looking for an exchange that accommodates the purchase of Bitcoin with fiat money:

Coinbase is popular and easy to use, with a strong global presence. The exchange has the necessary security measures as well as delivering adequate liquidity for trading.

When searching for the right exchange, it is worth noting that each has its pros and cons. The important thing is to identify the exchange that, first and foremost, delivers on your personal requirements.

Other popular exchanges include:

These crypto exchanges not only cater to Bitcoin investors and traders but altcoins in general.

It’s also worth considering exchanges that offer a wider choice of cryptocurrencies and altcoins. This would allow you to diversify your investments and gain exposure to the broader crypto market.

Bitcoin to Crypto Exchange

The next exchanges that you should look into are the ones you will be using for the Altcoins. Many of the smaller coins, my market cap, are generally not supported by larger exchanges. Generally speaking, the only way to buy those smaller coins is by buying them using Bitcoins or Ethereum.

On most exchanges, you need to deposit Bitcoins as you cannot buy coins directly from the exchange. This is why it’s crucial that you have a Fiat to Bitcoin Exchange first.

You can buy Altcoins from Binance, BitTrex, Kucoin, and Kraken.

Choose the Right Wallet

The next step in the crypto investment journey is to select the appropriate crypto wallets. It is essential to have your crypto wallet before buying any cryptocurrencies. You will need wallets to store your coins within your secure personal wallets.

While exchanges allow investors to hold purchases coins within assigned exchange wallets, it’s recommended that you withdraw your cryptos and hold them in private wallets. This protects you and your investments from hackers and theft. It is also worth noting that wallet compatibility also needs to be considered.

Crypto wallets to choose from include but are not limited to:

Before Getting Started

Prior to deciding on the most suitable crypto exchanges and wallets to support your trading activity, you need a trading strategy. As part of your strategy build, there are a number of factors to keep in mind:

  • Only invest in what you can afford to lose
  • Do not take a loan to invest
  • Do your own research, monitor the news wires, and view technical analysis on the respective cryptos that you decide to go with. FX Empire covers the largest cryptos, with exchanges also providing technical analysis to their users free of cost.
  • Set realistic expectations, don’t be greedy, and know when to accept a loss. (It is easy to be influenced by the news wires and overzealous analysts talking of the next crypto boom or doom. It is best to block out such noise.

Forming a Crypto Trading Strategy

While identifying the most appropriate wallets and exchanges are vital, formulating a trading strategy is undoubtedly the most important pre-investment step for a prospective trader.

Key Decisions:

  • Cryptocurrency selection – A blend of the largest cryptos along with medium-sized to small cryptos by market cap is recommended. This also addresses any liquidity issues for the overall portfolio.
  • Worth noting – A certain cryptocurrencies may have values that exceed the intended investment size. In such instances, identifying an exchange that offers CFDs or partial investment of a crypto coin is important.
  • Trader durations – For traders with adequate time to trade, a short, medium, and longer-term trading strategy would make sense.
    • Smaller size, more volatile, coins increase earnings potential intraday. These should ideally form no more than 20% of the total investment pool.
    • The Largest coins should form longer-term strategies. With adequate research, however, smaller coins may also form part of this strategy.
    • For the more medium-term strategies, which would be anything beyond intraday but less than a month, a blended portfolio is recommended. This can comprise of small, medium, and large-cap coins.
  • In any trading strategy -using risk management tools and indicators is recommended. While there are fees incurred for using stop loss and trade profit, using these would protect your downside.

80/20 Rule

When considering crypto market volatility and the rise and fall of the smaller coins, an 80/20 blend of large-cap to mid to small-cap would be recommended.

This would provide the opportunity to make sizeable gains any sudden surge in the small to mid-cap cryptos, whilst also holding the more stable coins. Do note that stable is a relative term in the crypto market. Even Bitcoin can see sizeable swings on a given day…

Does the Number of Coins Matter?

It ultimately boils down to the investment strategy that you build. With a blended portfolio, 1 Bitcoin may make up your large-cap portfolio, or 20 Litecoin for instance. It is important to focus on the blend rather than the actual number of coins that make up each component of the portfolio.

Recommendations

Below is a range of cryptos to consider the different components of your portfolio. This is not a comprehensive breakdown of the broader market and there may be coins that are more to your liking. As always, carry out the necessary research before hitting the buy or sell order…

Large Caps

Tezos, Ripple, Bitcoin, Ethereum, EOS, Cardano, Bitcoin Cash SV, Bitcoin Cash, and Binance Coin.

Mid-Caps

Zcash, VeChain, True USD, Tron’s TRX, Qtum, OmiseGo, OKB, NEO, Ethereum Classic, Dogecoin, DASH, and Cosmos. These have been selected based on 24-hour volumes and have market caps of between $100m and $1bn.

Low Caps

This will consist of cryptos with a market cap of less than $100m and will likely have lower trading volumes. That means less liquidity, which is why this component should form a lower proportion of the portfolio.

Unibright, Theta Fuel, Status, MCO, Matic Network, IOST, HyperCash, BitTorrent, and ABBC Coin.

Next Steps

Once you have built your strategy, selected your cryptos, opened your trading accounts, and set up your wallets, it’s time to trade.

While you may be able to have a better sense of when to enter more mature markets, such as the global equity market, it’s less simple to pick the right entry point in the crypto world.

Other than entering at an all-time high, there’s no hard and fast rule other than waiting for any sell-off to flatten out.

Once you start trading, remain disciplined, and ensure you run your risk parameters each day.

These will include your charts that should have your support and resistance levels embedded.

And remember, not every trade will yield a return, so don’t panic should your first trade take a hit.

Bitcoin’s Lightning Network Complete Guide: How Can it Solve Bitcoin’s Biggest Problem?

Bitcoin scalability Issue

Scalability is one of the biggest issues that has made Bitcoin mainstream adoption difficult. The issue relates to the number of transactions that the bitcoin network can process at any given time.

Bitcoin ecosystem has evolved from what it used to be in the early years when it paid host to only a few dozen passionate enthusiasts. The network has grown to a point where it attracts over 10 million users a day.

An increase in the number of users, while a good thing, has resulted in an increase in the number of daily transactions carried out through the blockchain, believed to be hundreds of thousands. Increased numbers of transactions has led to delays, with some transactions taking hours to be added in the blockchain.

Despite being the biggest cryptocurrency by market cap, Bitcoin lags behind when it comes to transaction processing speeds compared to other blockchain projects. Ripple leads the pack as its blockchain processes transactions in seconds.

Hefty transaction fees is another issue that continues to dent bitcoin sentiments in the crypto sector. Transactions fees can hit highs of $28, something that is unacceptable given that the network is expected to be an improved version of online payment systems.

Concerned by the scalability menace, some developers appear to have found a solution that could address the high transaction fees as well as slow transaction speeds once and for all.

Bitcoin Lightning network is the new protocol, touted as the ultimate solution to Bitcoin’s havoc causing an issue.

What Is Bitcoin Lightning Network?

Simply put, Lightning Network is a new payment protocol that will be added on top of bitcoin to enable instant transactions between nodes in a blockchain. It is seen as the answer to bitcoin’s persistent scaling issue as it will reduce transaction fees while making it easy for people to send and receive instant payments.

Thaddeus Dryja proposed, and Joseph Poon proposed the new protocol in a white paper published in 2015. The proposed protocol consists of user-generated channels able to send payments back and forth, in a secure and trustless fashion

How Bitcoin Lightning Network Works?

For Lightning Network to operate, there must be two people looking to transact with each other using Bitcoin. In that case, the two will have to set up a multiSig wallet, which is to be used as a storage facility for bitcoins transacted.

Once a wallet address is saved on a bitcoin blockchain, a setup payment channel is opened through which the two parties can conduct an unlimited number of transactions without touching information stored on the blockchain.

It is important to note that it is not a must to set up a channel to be able to carry out a transaction with the new network. Lightning Network is designed in such a way that it can send payments to the desired node, using the shortest route possible.

With the completion of each transaction, each party involved must sign an updated balance sheet to indicate how much of the bitcoins stored in the wallet belongs to them. The channel is only closed when the two parties are done transacting.

The resulting balance on completion of the transaction would only be reflected in the blockchain on the closure of the channel. Information stored in the blockchain can be used in the event of a dispute.


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How Can Lightning Network Solve Bitcoin’s Problem?

Even though Lightning Network is yet to be fully implemented on Bitcoin Blockchain, some people have shared their experiences of using it. The experiences so far have been good with a good number of people confirming fast transaction speeds as well as reduced transaction fees.

A Reddit user claims to have used the new protocol to purchase a VPN router through a payment channel provided by TorGuard, a proxy service provider that claims to accept Lightning network. Michael Landau, a Twitter user, also claims to have made a Lightning payment on Bitcoin testnet with the transactions being confirmed in under 2 seconds. Transaction fee, in this case, was 0.000001.

Amidst the positive remarks, Lightning network may not be the ultimate cure for Bitcoins scalability issue. The protocol is only expected to phase out a good chunk of the issues. First and foremost, Lightning pre-funded channels tie up funds that could as well be used for other purposes. Because of this, people may opt to keep low balances in the channels and top them from time to time when the need arises.

The second challenge that could grip Lightning Network has to do with the fact that people could end up funding their channels at the same time. Soon after funding, the balance could diminish considerably on payments being made. Such a move could trigger liquidity issues on the network. In such a case, it could be difficult to find a payment route for large payments in some cases.

However, the illiquid problem could be solved through the creation of a large payment channel that would be left open and fully funded all the time. By doing so, there will always be a route for making payments regardless of the amount being transacted.

Benefits of Lightning Network

Earn Interest on Providing Liquidity

Using Lightning Node promises to be a win-win situation for parties, on both sides of a transaction. The network will reward users who provide liquidity by lending bitcoins to be used in the channels. It is still unclear the amount of interest Lightning Node will pay.

However, it is expected to be something exciting sure to keep people running the lightning node. For a start, the interest for lending bitcoins is expected to be high as Lightning Network looks to get its way into most people accounts.

The rate could drop as the technology is adopted’ by more people. The profits on the Lightning node can be perceived as transactions fees for using the network.

Fast Transaction Speeds

The new protocol offers the best scaling solution to a problem that has plagued Bitcoin for months. With Lightning Network, people will no longer have to wait hours for transactions to be completed.

The added layer on bitcoin will enable the processing of millions of transactions per second. The network will also allow users to enjoy the security of decentralized blockchain without having to increase the size of a blockchain

Nearly free Bitcoin Fees

Bitcoin widespread adoption has been disrupted by growing concerns over transaction fees. Transaction costs have been known to clock highs of $28, regardless of the amount one is transferring. That said, fees incurred in transacting through Bitcoin Lightning Network should be much lower than when a transaction is carried out through Bitcoin blockchain. In some cases, some people may end up being paid for using the new protocol.

The fact that Lightning fees are not paid to miners all but mean it will be a cheaper way of sending money on the network. Lightning transaction fees will end up to users on the system that stake money. The owners are expected to charge a small fee for microloans

Lightning transaction fees are expected to keep dropping as more Bitcoins hit the network. People who wish to send money also stand a chance to select custom routes, if more privacy is needed, but at extra costs.

Smaller Micropayments

The smallest amount of bitcoin that one can send now is 0.00000001 BTC. However, with Lightning Network, people will be able to send much smaller bitcoins thereby enabling micro-payments.

People in some of the world’s poorest nations cannot transact using bitcoins, but with Lightning Network, they will be able to afford transactions in the popular cryptocurrency.

Increased Decentralization

There has been growing concerns that Bitcoin blockchains could become bigger and get out of control. With the implementation of Lightning network, bitcoin blocks are expected to be smaller which will allow people to run a full node.

In addition, it will be much easier to self-authenticate bitcoin transactions and enforce bitcoin rules thereby making Bitcoins Network more decentralized.

Increase Security

The use of channels with Lightning Network will make it nearly impossible for hackers to steal people bitcoins. For example, if an exchange has open channels with each user who has a wallet, a hacker will not be able to simply take coins held in LN channels.

The only thing that hackers will be able to do with the new protocol in place, is close channels to be able to access the portion of the balance belonging to an exchange. While the same can be done without user consent, they will still have to wait for the lock-time built into the channel. During this time, an exchange would have ample time to regain control and advice users to close channels from their side.

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How Can Anyone Join Lightning Network?

Lighting Network is Off-Chain, which means it is not part of Bitcoin Record now. That said, there are a number of ways one can be able to enjoy fast bitcoin transactions at low costs via the new protocol

Using A web Wallet

The simplest way to access and enjoy the benefits of Lightning Network is to use a web wallet such as HTLC.me. The web-based lightning wallet makes it possible to start making Bitcoin payments using the protocol without any configuration.

All you need to do in this case is ask the person you would wish to transact with, to as open a Lightning wallet on the HTLC.me to be able to send them some Bitcoins

Using Desktop Wallets

There are two desktop wallets that’ make it possible to use the new bitcoin protocol. Lightning-ape wallet and Zap use Lightning Network Daemon LND as the back-end client to use balance and channels. To be able to set up the Lightning app, you will have to go to Github page and download the latest version of the app for installation. To install Zap wallet, you will have to visit its official webpage Zap.jackmallers.com to learn more

Phone Wallet

Currently, there are three phone wallet, LND, Éclair and C-Lightning designed to enable transactions through Lightning Network. Éclair is the first Android Lightning Network enabled-app that one can download on Google Play store and be able to carry out low-cost bitcoin transactions.

Lightning Network Releases

It is still unclear when lightning Network will be part and parcel of Bitcoin blockchain in addition to the third party apps that people can use, to access it. The network’s developer’s team recently released a beta version of Lightning Network Daemon that allows people to access the Bitcoin’s Lightning Network which is still in development.

The release comes after more than a year extensive research. However, there are still a number of implementations, which Lightning Network labs team is still working on, ahead of the official launch. It appears’, the official launch could happen soon, given the milestone the developer’s team has achieved so far.

For instance, Lightning network has surpassed 1000 active nodes milestone on its Bitcoin Mainnet. Since its launch in testnet and mainnet, it has continued to achieve significant growth seen by the number of bitcoin nodes joining the network.

However, there has been growing concerns about the robustness of the network’s protocol, which is important if it is to stand any chance of handling thousands of transactions on a daily basis. It is also unclear whether the protocol is super tight to ensure users don’t lose their funds in the long run.

Security considerations as well as lack of understanding of how the protocol works have been the biggest headwind that has prevented fast roll-out of the protocol.

Buy & Sell Cryptocurrency Instantly

Don’t Trade Cryptocurrencies Before You Read this Guide

Imagine that a friend takes you to a nice bar that is a known hang-out for smart, professional investment managers. You walk into an unfamiliar place filled with well-dressed, successful looking people and strike up a conversation with one of them. They tell you about a great investment, and then offer to “let you in” by taking a picture of your credit card and charging the amount you want to invest.

Does this strike you as a good idea? It describes what is happening in the cryptocurrency markets these days. There are real opportunities and plenty of advice on where to make a nice profit, but the way anyone should go about investing has not changed. The problem is that some of the people in the “nice bar” are not nice at all and are looking for people who are new here so they can take advantage of them.

What is Cryptocurrency?

To understand this you need to understand the people. Cryptocurrencies are based on sophisticated computer codes and networks. The first people to understand and use them were people familiar with computers, computer coding, and computer networks. This is who is in the “nice bar” on our opening analogy. Of course, some of these people are nice, but no one would assume everyone in any crowd is nice.

Cryptocurrencies have become very valuable. That means people who know how to steal things like credit card numbers or other personal information have a great incentive to steal cryptocurrency. Those who are familiar with computer networks and computer coding have a natural advantage because cryptocurrency exists on their “turf”.

Cryptocurrencies are blocks of code stored in a decentralized ledger. A person owns the cryptocurrency by having the address of that block of code. The address is where the code can be found on the ledger. Cryptocurrencies are spent by sending the block of code from one address to another.

Each address has a public access and a private access. Anyone can use the public access – called the public key – to put money into the address. It’s like putting money into a vending machine. Only the person with the private access – the private key – can take money out of the address. It’s like the key that unlocks the vending machine, giving the person with the key access to everything inside.

Safety Measures Start at Home. Secure Your Computer.

Keep in mind that trading cryptocurrencies are done over the Internet, and all the safety precautions that apply to e-commerce apply to cryptocurrencies. In addition, it is always a good idea to keep the Operating System (OS) of your computer up-to-date by installing updates as soon as they are available. Updates often include protection against malware and computer viruses.

There is an additional step some experts advice before investing in cryptocurrencies. In order to be certain your computer is not infected with a virus already, they recommend removing all data files and reinstalling the OS.  This is sometimes referred to as “rebuilding the machine”, and is the ultimate method of ensuring the computer is free of viruses.

There are also a variety of commercial software programs that provide anti-virus protection. These range in price and effectiveness. However, the current trend in cyber attacks is moving away from viruses and toward other strategies. These include phishing attacks which attempt to trick individuals into sharing important information through deception. Because this strategy involves human action, computer software is not an effective defense.

A Word about Passwords

Passwords are important because trading cryptocurrencies at this point in time (Early 2018) require establishing accounts in several places. You need to create a wallet that will hold your cryptocurrencies (more on this later) and accounts at the exchanges where you will do trading. It may be necessary to create separate wallets for different cryptocurrencies as well as accounts at different exchanges.

These accounts will require passwords. Be sure to create strong passwords that include capitalizations, numbers and any other characters allowed by the system. Some systems allow passphrases rather than passwords. In either case, use the strongest possible password you can create. Do not use the same password or passphrase on multiple sites.

Remembering these passwords is absolutely critical. Experts highly recommend a password manager to help maintain the passwords and passphrases. A password manager is an online service that encrypts passwords and unlocks them with a different password. Alternatively, you can write down your passwords on paper. If you take this approach store the paper in a secure location away from your computer.

An increasingly common approach with many cryptocurrency passwords is two-factor authentication (2FA). This turns a password into a process that requires the use of two devices. For example, entering a password or passphrase on a website sends a unique security code to the phone number registered to that account. That code must be entered before access to the account is given.

The development of 2FA and passphrases both indicates both the importance of the information in the cryptocurrency accounts and the technological ability of those designing these systems. It is a feature of the overall environment and should be understood by anyone who wants to own or trade cryptocurrencies.

How do I Store my Cryptocurrencies?

Wallets have already been mentioned. Remember that to own a cryptocurrency means you own the address on the blockchain where that unit of the currency is stored. This address is a bit of computer code that has to be recorded somewhere. The place where it is stored is called a wallet, and like passwords and passphrases, these need to be protected.

However, unlike passwords the computer code addresses for cryptocurrencies cannot be written down on paper. They must be stored electronically, which means they have to be either online or on a removable computer storage device.  In the jargon of cryptocurrencies, this means either “hot” or “cold”.

There is an important distinction to be made here. When trading cryptocurrencies it is necessary to transfer them to an exchange. This account at an exchange is password protected, but it is not a wallet. Accounts at exchanges should only be used as a temporary holding place while trading. As soon as the trade is complete transfer the cryptocurrency to a secure hot or cold wallet.

Wallets are sometimes confusing because we are still at the beginning of the cryptocurrency industry, and there are only a few wallets that can hold different cryptocurrencies. This is a byproduct of the coding used to create blockchain.  Rapid developments in this area may soon result in universal wallets that can hold all types of cryptocurrencies.

Hot Wallets

As was mentioned, these are online wallets that are accessed through a website. The information in the wallet is stored on a server that is always connected to the Internet. Hot wallets are password and passphrase protected but are vulnerable to attack by hackers.

Desktop and mobile wallets are a hybrid between hot and cold, and so might be called a lukewarm wallet. These wallets store the cryptocurrency information on a desktop, laptop or mobile device and not on an Internet-connected website. This is potentially safer but is not without risks.

The greatest risk is that the safety protocols of personally owned devices are not enough to stop a determined attacker. This risk is why experts recommend reinstalling an OS prior to trading cryptocurrencies. Another layer of security is available by using a Virtual Private Network (VPN). This will be discussed later.

The benefits of an online hot wallet include professional security management.  However, this is offset by the “larger prize” of successfully breaching the protective protocols, since that could provide the hacker(s) with access to multiple wallets. A downloaded lukewarm wallet represents a “smaller prize” but a potentially easier target.

Cold Wallets

Storing cryptocurrency information on a removable computer storage device is the functional equivalent of disconnecting a laptop or mobile device containing this information from the Internet. When the storage device, such as a USB thumb drive, is removed from the computer it is removed from the Internet.  This is the safest place to prevent this information from being stolen by way of the Internet.

However, the small size and portability of USB thumb drive also mean that they can be easily lost or damaged.  This is an unavoidable trade-off. However, it is easier to protect a USB thumb drive than it is to install and remain current on Internet security protocols.

Some experts would classify paper wallets as another form of cold wallet. The name is misleading since a paper wallet is actually just the public and private addresses of a hot wallet in alphanumeric or QR code printed on a piece of paper. This information does not have to be printed but can be stored in another computer document.

Storing a paper wallet on a personal computer or mobile device, of course, raises many of the same issues as storing a hot wallet on such a device. One difference is that the document storing the public and private keys may not include the website where the wallet actually resides. However, a dedicated hacker seeing a transaction on a cryptocurrency exchange may trace the account back to the electronically stored “paper wallet”.


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Operate on a Virtual Private Network

“Covering your tracks” against this possibility is the purpose of a Virtual Private Network (VPN). To understand how this works and why it might be beneficial it is necessary to understand an Internet Protocol (IP) address and what it does.  Simply put, it is the location of any Internet-connected device.

It just makes sense that this type of address is necessary. After all, opening a webpage means the webpage that has the graphics and text needs to send that information to your computer. This means it needs an address, just like the webpage itself has an address. Individuals with computer skills can track these addresses.

Preventing this tracking is the role of a VPN. Technically it is a second IP address that operates on your computer and the rest of the Internet. Your computer connects to this IP address, which then passes along all requests for information to the rest of the Internet while protecting your computer’s IP address. Anyone watching Internet traffic at a website only sees the IP address of the VPN.

This procedure prevents anyone from “following” your trail back from a cryptocurrency exchange. They can only get as far as the VPN. Keep in mind that anyone spying on your computer over public Wi-Fi is already behind the VPN address and is watching your activity directly. This strongly suggests not trading cryptocurrencies over this type of Internet connection.

Conclusion

All of these security precautions may make it seem that investing in cryptocurrencies is just too difficult for the average person. This is not correct.  Many of these procedures are recommended for anyone buying anything over the Internet. Information on credit card numbers and other financial information is just as valuable as cryptocurrency assets and deserves the same level of protection.

In addition, the market for cryptocurrencies is developing rapidly. Both large, traditional financial organizations and new start-ups are entering the market, bringing a range of services that may simplify the security processes described here. These organizations may create cryptocurrency brokerage accounts similar to those that exist for stocks and bonds.

This would obviously simplify the processes described here and make investing in cryptocurrency much more accessible for the average person. This, in turn, could bring more buyers to the market and positively impact prices. If this happens, individuals who have gone through the process of creating wallets and exchange accounts could be well rewarded for the time and effort invested in that process.

Understand Bitcoin Futures: A Step-by-Step Guide

What is Bitcoin Future?

Within a futures market, an investor is able to trade futures contracts, which involves the purchase of an asset class at a particular price with a settlement date set at some point in the future.

The underlying value of the futures contract for a particular instrument is then priced according to the actual asset itself, whether gold, crude, an index or individual stock.

Futures markets have been prevalent in the financial markets for many years, with the first modern era futures market reported to have been the Dojima Rice Exchange, launched in Japan in 1710. Some suggest that the London Metal Exchange that was founded in the 19th century traces back to the 16th century and that’s before considering 1750 BC’s Code of Hammurabi that allowed the sales of goods and assets to be delivered for an agreed price at a future date.

Futures contracts contain the details of the asset class in question together with the purchase size, final trading day, maturity date and exchange on which the contract is being bought or sold. Futures contracts are created based on demand and do not get automatically created in the marketplace, involving two parties, where one party is going long on an asset class, while the other goes short.

Upon expiry of a futures contract, the settlement is either physical, in the case of commodities, or via a cash settlement in the case of Bitcoin, though the futures contracts are likely to change hands on numerous occasions before expiry. It is important to note that the futures market is used by investors looking to hedge exposures to a particular instrument or by speculators, neither of whom are actually looking for physical delivery that is akin to the spot /cash markets.

As investors have become more knowledgeable about the markets and the influences on asset classes, the futures markets have become a guide for investors on the likely direction of commodities, stocks and indexes on a given day, with crude oil futures, gold futures and the the Dow Jones reflecting investor sentiment towards the respective instruments and the direction based on the flow of information that influences supply and demand dynamics.

For investors looking to hedge, there will already be some form of an exposure to the spot or physical and the futures markets allow the company or investor to protect the upside or downside with a futures contract. As an example, airlines are well known to protect themselves against significant rises in crude oil prices, by buying a futures contract today with a specified price and delivery date in the future, on the assumption that oil prices will be on the rise over the period in question. In this case, the airline is exposed to the cost fluctuations of crude oil as a physical but is looking to protect itself in the futures market. If crude rises in value by $20 per barrel over the year and the airline has a futures contract at $5 per barrel above the current price, the impact on earnings is significantly less than without the execution of the futures contract. In this example, the airline would be taking a long position, while the party obligated to deliver the crude oil will be taking a short position, as they are the seller, while the airline is the buyer. An airline is unlikely to take a short position in crude oil, as declining prices benefit the bottom line.

In contrast to investors or companies looking to hedge exposures, speculators will be looking to benefit from the price fluctuations of an asset class without actually having a physical exposure to the asset class in question. The incentive for a speculator is profit from the general direction of contracts decided upon by their outlook on supply and demand for the particular instrument.

In summary:

Hedgers can go either long or short. Short positions are taken to secure a price now in order to protect the hedger from declining prices in the future, while long positions protect against rising prices in the future.

Speculators go short on the expectation of prices falling in the future while going long on the assumption that prices will be on the rise.

With Bitcoin now having been in existence since 2009 and become a sizeable instrument by market cap comparable to some of the largest listed companies on the U.S equity markets, it comes as a little surprise that futures exchanges have moved ahead on offering investors with the option of Bitcoin futures contracts.

The Cboe futures exchange launched Bitcoin futures on 10th December 2017 and is considered to be the first step in the evolution of Bitcoin into a mature asset class, with the futures market providing investors with greater liquidity, transparency and an efficient price discovery system.

CME Group followed Cboe with the launch of Bitcoin futures on 18th December, with both exchanges providing hedgers with a platform to hedge existing exposure to Bitcoin, while both allow exposure to Bitcoin without actually owning Bitcoin, opening the door for the speculators.

For Bitcoin, miners will receive some relief from the launch of the futures market, with the sizeable investments into mining equipment, not to mention exponential gains, needing some protection against price declines, while the speculator may be looking for the rally to continue and reach the stratospheric heights predicted by some in the marketplace, or in some cases, for the bubble to burst.

Bitcoin Futures Specifications: Cboe and CME

While Cboe Bitcoin futures was the first to launch, the CME Group is considered to be the world’s largest futures exchange.

Both exchanges have opened the door for the larger institutional investors to get in on the Bitcoin game through a more regulated, transparent and liquid market.

Since Bitcoin is a virtual currency, settlements will be cash-based and in U.S Dollars and unlike the cryptomarkets, where trading is 24-7, the futures exchanges are not, with more regular trading hours and limited to 6-days per week.

There are some key differences between the two exchanges and what’s on offer for those looking to hedge exposure to Bitcoin or speculate on future prices and some of the key differences include:

  • CME Group’s Bitcoin futures contract price will be based on a large number of exchanges, from which the CME CF Bitcoin Reference Rate (BRR) is derived on a daily basis. In contrast, the Cboe futures prices are based on a closing auction price of Bitcoin on a single Bitcoin exchange known as the Gemini exchange.
  • With cryptocurrencies having experienced significant volatility, it comes as no surprise that both exchanges have quite high margin requirements. CME Group’s Bitcoin futures margin requirement is 35%, whilst Cboe’s is 40%. The size of a margin requirement is a reflection of asset class volatility. To put it into perspective, the margin for an S&P500 futures contract is just 5%.
  • Both exchanges involve cash settlement of futures contracts on expiration date
  • On the Cboe futures exchange, a contract unit is equivalent to 1 Bitcoin, while on the CME Group exchange, one contract is equivalent to 5 Bitcoins.
  • Contract expirations also differ. The CME Group will have futures contracts that expire in the nearest 2-months in the March quarterly cycle and the nearest 2-months outside of the quarterly cycle. In contrast, the Cboe group will list 3 near-term serial month contracts, before including 4 near-term expiration weekly contracts, 3 near-term serial months and 3-month March quarterly cycle contracts.
  • Clearing on the CME Group exchange is via CME ClearPort, while the Options Clearing Corporation is used for the Cboe exchange.
  • Limits are also in place on how far the respective exchanges allow prices to move before temporary and permanent halts are triggered. On the Cboe exchange, contracts are subject to a 2-minute halt should the best bid or offer price, in the first contract to expire, move by 10% from the prior day’s close. Upon resumption of trade, should the contract price move by 20% above or below, trade is halted for 5-minutes. On the CME Group exchange, contracts will be halted on price move limits of 7%, 13%, and 20%
  • On the CME exchange one other distinct difference in the halt rules is that in the event of the contract hitting the 7% or 13% limit, trading continues without a halt as long as the price remains within the price limit for a 2-minute period. In event that the price falls back from the limit, the halt limit is raised to the next, whether 13% or 20%. In event that the contract price hits the 20% limit, there is no halt in trading and trading will simply continue within the 20% limit through the remainder of the session.

How to Buy and Sell Bitcoin Futures?

Bitcoin futures based on Gemini’s auction prices are available for trading solely on Cboe’s Futures exchange. Brokers that offer the trading of XBT (Cboe Bitcoin futures) futures include Advantage Futures, Interactive Brokers, Straits Financial, and TradeStation.

For CME Group Bitcoin futures, trading is made available on CME Group’s own site, whilst CME Group also provides a list of brokers and block liquidity providers for those looking to execute block trades or are looking for an intermediary.

For those looking to enter the Bitcoin futures market, the first and fundamental question is whether the motivation is speculative or to protect current Bitcoin earnings from any downside.

Choice of exchange may be considered arbitrary, but it would be best to go with the exchange with the greatest number of futures contracts issued, as both will be considered liquid from an investor perspective.

As we addressed before, contract sizes differ on the respective exchanges as do margin requirements, so these are also considerations.

When looking to trade with margin, this is essentially the funding component of the trade executed on the futures exchange. As investors will not actually own Bitcoin itself, there is no need for the full value of the purchase to be paid in advance of the contract expiry date. In the event of an investor holding a contract until the expiration date, the amount paid, if out of the money, is limited to the difference between contract price and the actual price. The margin is placed on a margin funding account as collateral for the trade.

In addition to the collateral, also referred to as initial margin, investors are required to meet Mark-to-Market calls during the duration of the futures contract. The Mark-to-Market (“MTM”) margin is the difference between the cost of the position held and the current market value (“CMV”) of the position. In the event of a loss, the exchange will fund any margin shortfalls stemming from a MTM call from the investor’s margin funding account. The reverse is also possible, where the exchange funds the account where the investor has margins in excess of the required amount.

In the event that the margin funding account falls below acceptable levels, the investor will then be required to fund the account to meet future MTM requirements.

As we mentioned above, contract sizes between the 2 exchanges are different, with the minimum contract size on the CME Group exchange being 5 Bitcoins, compared with 1 Bitcoin on the Cboe exchange. For institutional investors this may be less of an issue, but for a retail investor, that’s a minimum margin of $33,250 based on a Bitcoin value of $19,000 on the CME Group exchange, compared with a margin of $7,600 on the Cboe exchange, assuming an investor is looking for the smallest size contract.

Final settlement on both exchanges is in U.S Dollars, with no actual Bitcoins held during the duration of the contract that requires settlement. With futures contracts being a 2-sided market, involving a buyer and a seller, counterparty risk on the final settlement is absorbed by the respective clearing houses and not the party in the money.

It’s worth noting that, while those looking to hedge Bitcoin’s value are likely to hold futures contracts through the expiration, speculators are likely to be buying and selling Bitcoin ahead of expiration, taking advantage of daily movements in response to market noise. For this reason, market liquidity is particularly important for those holding futures contracts as an inability to find a buyer can have quite dire consequences to the futures market and the price of Bitcoin itself.


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How Can Bitcoin Futures Affect Bitcoin Trading?

Since the launch of the Cboe and CME Bitcoin futures, Bitcoin has received a double bounce in value, with the upside in Bitcoin coming off the back of Bitcoin futures valuations on each of the individual launch dates.

The gains have come off the back of Bitcoin futures seeing an uptick in value above Bitcoin’s actual value at the time of launch of each of the respective exchanges. With the general theory being that the smarter institutional money is going into the Bitcoin futures market, investors in Bitcoin will be looking towards the futures market as a guide to the future direction of Bitcoin, based on information available in the marketplace.

Added to the influence of both the Cboe and CME group Bitcoin futures is the fact that both provide investors with the option to go long or short. Increased appetite for lower prices would see the value of Bitcoin futures contracts decline, which would likely lead to price declines in Bitcoin itself. When we look at the Dow mini or the S&P500 futures, daily movements have a material impact on the direction of the main indexes each day, barring the arrival of new information to which investors respond during normal trading hours.

For now, the number of contracts is considered relatively small and investors may take less direction from the respective exchanges, but we will expect the number of contracts to grow over time and provide some idea on which direction Bitcoin will take on a given day.

We would expect the CME Group contracts to have a greater impact on the price of Bitcoin since the futures price will be based on Bitcoin’s price from a number of Bitcoin exchanges, not to mention the CME Group’s status in the futures market.

For those looking for the latest futures contract prices on the respective exchanges: CME GroupCboe

For those who are interested in Bitcoin and other cryptocurrencies trading, below is a list of our recommended brokers.