4 Questions You Should Ask before finding A Bitcoin Broker

I asked an expert from a leading financial services company what he thought of Bitcoin trading and here was his reply: "Since a lot of Bitcoin is used for illicit activity, I don't trust it."

While I can't verify the "illicit" part of that statement, I'm on the skeptical side of cryptocurrency trading and speculation. We're still in the Wild West phase.

There's little question that we need to know more about cryptocurrencies. While I'm optimistic that the blockchain technology will disrupt financial services in a good way, a little regulation would help.

The Russian Finance Ministry, for example, said it would regulate cryptocurrencies by the end of the year. The country, which doesn't exactly wear a cybersecurity halo, said there was "no point in prohibiting" cryptocurrency trading.

China, on the other hand, recently shut down Initial Coin Offering operations.

Shutterstock

Here's what Reuters was reporting on the Chinese action:

"Bitcoin fell sharply on Friday after Chinese financial publication Caixin reported that China was planning to shut down local crypto-currency exchanges, although analysts said this was just a temporary setback.

The news follows China's move earlier last week to ban so-called initial coin offerings, or the practice of creating and selling digital currencies or tokens to investors in order to finance start-up projects. Reuters was not immediately able to verify the report."

There are countless reasons to be cautious with cryptocurrencies. They are not transparent and uregulated. They are also incredibly volatile.

Here are some trading questions offered by ForexLive:

-- Do you hedge? We all want to make money on our investments, but with cryptos there's a lot of downside. You should be able to hedge your position to stem your losses.

"The reason hedging is important is it provides clarity on a broker's risk management policies. Due to volatility in bitcoins and other cryptos, brokers that are unhedged are more exposed to large losses caused by their client base."

-- Can you trade on the weekend? Despite crypto exchanges being open, a broker and their market data providers may not want to be. Therefore, not every broker supports weekend trading.

As a result, if the bitcoin and ethereum market is moving during the weekend, traders may not be able to react if their broker is closed."

-- What will trades cost you? All brokers charge commissions and offer margin accounts.

"When trading cryptocurrencies, traders should keep in mind that they are priced more similarly to equities than forex. Therefore, in addition to wider spreads, many brokers also charge a commission on crypto trades.

This increases the overall cost of trading and shouldn't be overlooked. Therefore, leverage on bitcoins and similar products is often 10 times or lower. Depending on a trader's strategies and risk tolerance, margin rates could be an important factor of which broker they use."

Bitcoin talk- Will bitcoin price recover after... by tokoburi-sim

-- Does the broker offer short sales? This is a way of protecting yourself and making money when the price drops.

"Does a broker offer short trades of their cryptocurrency products? Due to only a handful of hedging solutions for opening short trades, many brokers limit their crypto products to 'long' only.

As shorting is an important strategy, for many, trading with a broker that doesn't allow shorting cryptocurrencies is a non-starter.

This is especially the case with bitcoins and other cryptocurrencies that are viewed to be in a bubble and prone to sharp 10-15% intraday drops where shorting would be profitable."