How Beginners vs Experts Invest in Cryptocurrencies
When it comes to investing in cryptocurrencies, both beginner and professional investors tend to use a Bitcoin investment site to enter the market.
In short, Bitcoin investment sites are platforms that allow customers to purchase Bitcoin either directly using a fiat funding method like a debit or credit card, or indirectly by trading it for another cryptocurrency on a peer-to-peer exchange.
But as we will soon see, the process and specific platforms inexperienced and professional investors use to enter the market typically differs considerably, and for good reason.
Bitcoin Investment Sites: the Different Types
Cryptocurrency investment sites can be broadly separated into four major categories: Bitcoin brokers, spot trading platforms, derivatives exchanges and OTC desks.
With that in mind, it is important to recognize that there is considerable overlap between these, since many platforms offer services that could technically fall into several categories.
Bitcoin Brokers
Bitcoin brokers are one of the first types of Bitcoin investment sites most new investors come across. These platforms simply act to buy or sell Bitcoin and often other cryptocurrencies directly to/from a customer, and typically provide a free cryptocurrency wallet service, allowing customers to store their Bitcoin directly on the platform.
Many cryptocurrency brokers are also known as fiat on-ramps, this is because many of these platforms allow users to make their cryptocurrency or BTC investment using their debit or credit card. These have the benefit of being simple to use, but are usually rather limited in terms of trading functionality, since they usually don’t offer advanced order types, such as limit or stop loss orders.
The vast majority of popular Bitcoin brokers are regulated entities, which make them far safer than most pure spot trading platforms—which are largely unregulated. However, these are often one of the more expensive ways to invest in Bitcoin, since these platforms typically charge a relatively high spread and/or an execution fee on all orders—with the total commission often exceeding 5%.
Spot Trading Platforms
The vast majority of Bitcoin investment sites fit into the category of spot trading platforms. In brief, these platforms allow cryptocurrency holders to trade with one another through a matching engine that ensures the customers on both sides of the trade are protected at all times.
These can be centralized exchange platforms where customers send their funds to a central cryptocurrency wallet offered by the wallet platform. Or they can be decentralized exchanges, which do not take custody of the user funds, but instead lock traders into agreed trades through the use of smart contracts.
Spot trading platforms typically include more advanced trading tools and order types than basic brokerages. These are one of the most common types of platforms used by professional traders, since they usually offer a wide range of different order types, built-in charting functionality and a large array of different trading pairs—allowing users to trade Bitcoin in addition to a variety of altcoins.
Many of the most popular Bitcoin spot exchanges have also began to expand their service offerings lately, allowing users to stake their cryptocurrencies on the platform to earn a yield, while others like Binance and Poloniex allow users to invest Bitcoin online through a built-in cryptocurrency lending facility.
Popular Spot Trading Platforms
- Binance.com
- Bitfinex.com
- Kraken.com
Cryptocurrency Derivatives Exchanges
Cryptocurrency derivatives are types of financial contracts that allow traders to speculate on the price movement of an underlying cryptocurrency without actually holding the cryptocurrency itself.
Since the release of the first Bitcoin futures contract in 2017 by the Chicago Board Options Exchange (Cboe), cryptocurrency derivatives exchanges have become far more common, and many are simple enough to be used by even traders with limited experience.
For the most part, these cryptocurrency derivatives exchanges are settled in either cash or stablecoins, based on the prevailing market price at the time of settlement. However, there are now several physically-delivered Bitcoin futures exchanges, which are settled in Bitcoin and are popular Bitcoin investment sites for institutional traders.
Since the launch in 2017, cryptocurrency derivatives and Bitcoin futures in particular have grown to become one of the most common ways to invest in Bitcoin. This can be attributed to the increased flexibility and power cryptocurrency derivatives offer over standard spot exchanges, since they allow traders to easily go both long and short on the market, and trade with up to 100x leverage in some cases.
Popular Cryptocurrency Derivatives Exchanges
- BitMEX.com
- OkEX.com
- Deribit.com
Over the Counter (OTC) Desks
Cryptocurrency over-the-counter desks are platforms that allow high net worth individuals, as well as businesses and large organizations to purchase and sell large amounts of cryptocurrencies in a secure manner.
These desks are often used by investors that are looking to fill large orders without going through public markets. By avoiding these platforms, traders can often negotiate better rates, clear large orders without affecting the spot price and benefit from increased security and privacy.
These platforms act to broker the deal between a buyer and seller, and some will assist with negotiating the terms of the arrangement and escrowing the funds, while others simply provide matching services. On the other hand, almost all OTC desks enforce a strict minimum trade size—usually in the order of $100,000+.
OTC desks can either operate as standalone platforms or can be found as part of a standard digital currency exchange or trading platform. The largest OTC desks tend to operate alone, but an increasing number of popular trading platforms are beginning to offer OTC functionality.
Popular OTC Desks
- Sfox.com
- Kraken.com
- GenesisTrading.com
Beginners Often Use Brokers
When beginners first decide to enter the world of cryptocurrencies, they will almost always find themselves landing on the doorstep of a Bitcoin broker—most commonly Coinbase or CEX, since these are the number one and two search results for “buy Bitcoin” on Google.
These platforms provide one of the simplest ways for those with little to no trading or investment experience to get their hands on BTC, while also providing an environment to store Bitcoin and other cryptocurrencies securely.
For those making their first purchase of Bitcoin, Bitstamp is often one of the first port of calls since it caters to beginner users through its instant order feature, but also allows customers to perform more advanced trades if they feel comfortable. Binance is similar in this respect, since customers can directly purchase Bitcoin and other cryptocurrencies with their bank card, but can also access peer-to-peer trading features if required.
Unfortunately, there are also a huge amount of Bitcoin doubler and high-yield investment programs (HYIP) out there which target new investors—typically by promising extraordinary returns that can tempt inexperienced investors into parting with their money.
Although these platforms vary by name and nature, one of the most prolific scams is known as Bitcoinvest, which claims to offer 200% profit within 30 days. It is important that new investors stay away from such “too good to be true” offers, since they are almost always exactly that.
Experts Use Professional Exchanges
When it comes to professional cryptocurrency traders, the three most important considerations before choosing a trading platform are: reputation, fees, and liquidity. For the most part, experienced traders will favor the Bitcoin investment sites with the best mix of these three parameters and will avoid platforms that have suffered a security breach at any point.
Because professional investors and traders often require a great deal of control over their orders, in particular how and when they are executed, they also tend to trade on platforms that give them this control—either directly through the website interface or through an API for automated and algorithmic traders.
In light of this, cryptocurrency derivatives trading platforms are a popular choice for Bitcoin traders, since they allow investors to speculate on the direction of the market and provide the ability to trade on leverage—allowing traders to multiply their exposure to market movements. As advanced financial instruments, trading derivatives like Bitcoin futures and options can be either extremely profitable or exceedingly costly, which makes them best suited to those with a good grasp over the market.
For their initial entry point, professional traders tend to favor OTC desks to brokers. Not only do they charge vastly lower fees, but they also protect against slippage and can facilitate much larger orders, making them ideal for those looking to buy in with a significant sum.
Alternatively, some experts bypass the Bitcoin exchanges entirely by instead investing in Bitcoin mining hardware—essentially specialized computers that are designed to participate in Bitcoin’s proof of work (PoW) consensus mechanism to discover blocks and receive block rewards. BTC earned as part of the block reward process can then be transferred to exchanges for trading purposes, or sold through brokers or OTC desks.
