How can you lower your risks while investing in digital currencies?

According to a statement to this newspaper, the “cryptocurrency giant” Bitcoin is being closely watched by financial analysts and investors around the world, and trading in digital currencies has now piqued the interest of major financial institutions such as Goldman Sachs and JP Morgan, as well as tech giants Intel and Nvidia.

It’s no surprise, according to the source, that blockchain technology has become a part of the global “financial revolution” in recent years, due to new solutions as well as speculative growth that “winks” at both individual and institutional investors.

In this post, we’ll go through two of the most prominent risk-reduction strategies utilized by both novice and expert investors: investing in cryptocurrency exchanges and contracts for difference (CFDs) backed by virtual currencies.

1.Exchange-traded digital currencies

Buying digital currencies directly on cryptocurrency exchanges is the most common method of investment.

You become the owner of a cryptocurrency when you make a buy transaction on an exchange, and the assets you acquire are held in your virtual wallet.

These exchanges have a large selection of digital currencies to choose from. Hundreds of digital currencies are available to investors in one spot.

Independent regulatory institutions, on the other hand, do not regulate cryptocurrency exchanges in terms of money security.

Furthermore, unlike supervised financial organizations (such as banks or brokers), cryptocurrency exchanges are not members of guarantee funds, which exist in each nation and provide the whole or partial recovery of investors’ monies or assets in the case of a probable collapse.

According to the source, in Romania, the government guarantees the recovery of possible losses in the case of a bank failure up to a limit of €100,000 from a single bank.

On the other hand, many exchanges still do not enable withdrawals of fiat currency equivalents (i.e. RON, EUR, USD, or any traditional currency), instead allowing only the transfer of cryptocurrencies held in another virtual wallet.

Furthermore, exchanges are not necessarily a secure location to keep digital currency. Many exchanges have already been hacked or have just vanished from the market, taking with them all of their investors’ assets.

The 2014 hack on MtGox, the largest exchange at the time, resulted in the loss of approximately 850,000 bitcoins, valued at about $500 million at the time.

To summarize, the main three obstacles of trading digital currencies on exchanges are:

-There is no external supervision body.

- A lack of regulation and measures to ensure that digital currencies be recovered in the case of an exchange failure.

- Issues with depositing and withdrawing funds.

2.Using cryptocurrency-backed assets to trade CFDs

A safer and more flexible alternative to cryptocurrency exchanges is to trade CFDs backed by cryptocurrency assets through a regulated capital market broker, the source points out.

You don’t own the underlying instrument (cryptocurrency) when you buy an asset-backed CFD on it; instead, you trade its “price,” wagering on whether it will rise or decrease in the future.

The ability to “short-sell” is one of the benefits of CFD trading that traditional trading does not provide. Essentially, if prices begin to decline, you can sell something you don’t have now and subsequently acquire it at a lower price.

This implies that you may profit not just from price gains, but also from price reductions, which is not feasible with regular bitcoin exchange trading.

You may also protect yourself from undesirable swings by temporarily “freezing” the outcome of a trade until the key period has passed using the short selling function. If you have purchased cryptocurrencies and their values begin to decrease, you may establish a cryptocurrency short-selling position on CFDs of equivalent volume, thus holding both a buy and a sell position on the same share and freezing the trade’s outcome.

You win on one by losing on the other, regardless of which way the price goes.

Basically, when two opposing positions are open at the same time, market swings have no effect on the result of your portfolio. When the fluctuation time has passed, you can close one of the positions, “unfreezing” the outcome and allowing the other transaction to continue without interruption. Hedging is the term for this financial approach.

Short selling is only possible with derivatives (such as CFDs).

The so-called protection orders — Take Profit and Stop Loss — are two more strategies for protecting against market volatility and minimizing risk.

Take Profit is a trading platform setting that instructs the platform to automatically end an open trade when the price hits a specified level, thereby automatically recording the profit, even if the investor is not in front of the platform to cancel the position manually.

Stop Loss, on the other hand, is a setting that instructs the trading platform to automatically cancel a trade when it reaches a certain maximum loss amount. Even if the investor is not using the trading platform at the moment, the deal will be closed as soon as the price hits the level stated in the order.

If we wish to take advantage of such safeguards, we should look for a broker who sells both proprietary products (such as stocks) and derivatives (such as CFDs).

Another aspect of CFDs is leverage, which enables for the same quantities to be traded with a portion of the money necessary in traditional investments rather than the complete amount, according to the source.

Few Romanians, for example, can afford to buy one bitcoin, but they may trade in bitcoin on CFDs through a broker for a fraction of the cost…

At XTB, the leverage for CFDs with active cryptocurrency backing is 1:2, which means that placing an order only requires 50% of the transaction value.

Leveraged trading essentially increases earnings while also increasing risk accordingly.

Another important factor is simple trading account liquidity, or the ability to deposit and withdraw cash quickly and efficiently.

The XTB broker, for example, offers a variety of deposit options, including bank card deposits.

You can withdraw your money at any moment, and it will be sent safely and securely to your bank account.

In accordance with its obligations as a Financial Institution authorized by KNF and registered with the Romanian Financial Supervisory Authority, XTB clients’ funds are kept in segregated accounts within ING Bank Romania, separate from XTB Romania’s funds, and whose owners are recognized as the clients and not XTB (ASF). This is a safeguard so that if the financial institution goes bankrupt, the clients’ funds are identified as belonging to them rather than the institution and are unaffected.

XTB is also a member of the Investor Compensation Fund, which is maintained by KDPW, Poland’s National Securities Depository.

As a result, dealing with a capital markets broker who can help with risk management might be the difference between investment success and failure.