Thinking about trading cryptocurrencies like Bitcoin? Let’s talk risk management.

06 Jul 2021

Cryptocurrencies, like Bitcoin, have seen increasing interest among retail investors in recent years. The investments in bitcoin by institutional investors and electric car maker Tesla only served to push that interest over the top.

But let’s be clear. Cryptocurrencies are a speculative investment asset.

Cryptocurrency prices can and do experience extreme market volatility. Digital currencies like the popular Bitcoin, can hit extreme lows and highs within a 24-hour period. On May 19 this year, Bitcoin fell to US$30,000, the lowest since January 2021, before recovering at US$38,000. Just 10 days before, the cryptocurrency had been trading at US$58,000 levels.

Bitcoin and cryptocurrency prices also do not appear to trade with any fixed pattern, beyond the occasional blips from bans by regulatory bodies and tweets by Tesla’s CEO Elon Musk.

Why is Bitcoin so volatile?

There are a couple of reasons for this volatility.

For one, Bitcoin’s real use case scenario remains tenuous.  Beyond the use of the digital currency by some Bitcoin afficionados, and a couple of cafes in Singapore that are said to accept the digital currency as payment, there are few other areas where regular consumers can and will use Bitcoin in real life.

Another reason lies in the lack of regulatory oversight which, incidentally, is the very reason Bitcoin was created in the first place. Bitcoin is mined, distributed, traded, and stored with a decentralized ledger system, also known as blockchain. By its very nature, since it isn’t issued by any central bank, it is proving to be more difficult to be regulated by them. At the same time, bitcoin proponents believe regulation would only serve to stifle innovation and curtail trading volumes.

On the other hand, the lack of regulatory oversight impacts the level of trust consumers and traders have in the digital currency, particularly as bitcoin has been known to be involved in scams, and illegal activities.

Ways to invest in Bitcoin safely

With this in mind, here are some ways investors can think about investing in Bitcoin while actively mitigating the risks.

1. Do your research.

Before putting your money into any new investment, you should first know what you are investing in. In this case, you can start by reading the original whitepaper on bitcoin by Satoshi Nakamoto, and learn more about the factors that affect its supply and demand.

2. Invest only what you are prepared to lose

Suffice to say, any investment in Bitcoin should not involve funds that you cannot afford to lose. Being a high-risk investment asset, the rewards can be huge, or leave you with nothing.

3. Start small

Investing small amounts at the start can help you to familiarise yourself with the market, and hone your trading techniques, before putting in larger trades. Even then, you should never put all of your money in a single trade.

4. Know how you want to invest (Bitcoin vs Bitcoin derivatives)

There are a few ways to invest in bitcoin. You can participate in the bitcoin market by purchasing the actual currency. This would involve buying bitcoin through a reputable exchange and storing it in a hot or cold wallet.

You can also invest in the price fluctuations of bitcoin through derivative products like funds, ETFs, and Bitcoin CFDs.

There are some key differences between trading bitcoin and bitcoin derivatives. A direct investment in bitcoin provides the most direct exposure, both to its risks and rewards. On the other hand, trading bitcoin CFDs can be an effective complement to Bitcoin trading as it allows investors to hedge their long position.

5. Have a plan in place

In a market as volatile as Bitcoin, the last thing you want to do is to sell off your position impulsively because prices have fallen, potentially making a big mistake. So you need to craft out your trading plan.

If you plan to do day trading, or trading the volatility of the market without holding overnight positions, then you should practice having profit targets and stop losses for every trade you place.

Alternatively, you might subscribe to the “buy and hodl” investing strategy. For the uninitiated, “hodl” is a deliberate misspelling of the word “hold” and is used by bitcoin investors to mean “hold on for dear life” or invest for the long term.

As a “hodler”, you should be prepared for your investment funds to be locked into the digital currency for a long period of time, and they should not be required for any future expenses, investments or emergencies.

With these simple risk management principles, you will be better equipped to handle any of the volatility that Bitcoin trading could – and probably will – throw your way. If you would like more information for risk management in trading Bitcoin, you can contact Phillip Futures.

Why trade on Phillip MT5?

Trade Forex, Gold, and CFDs (Shares, Indices, Cryptocurrency, Oil, and more) at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Download Trading Central’s Market Buzz for updates on more topics.

What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.


Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

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