Key Takeaways 

  • Crypto trading offers unique opportunities: Despite the risks, crypto trading can be profitable due to its high volatility, providing the potential for significant returns. It can also be an effective diversification strategy and could make up for losses incurred in other trades. 
  • Understanding risks is crucial: The decentralized nature of cryptocurrencies can pose potential threats. These include security concerns, sudden price volatility, and regulatory uncertainty. It’s essential to have a strong understanding of these risks before venturing into crypto. 
  • Leverage can be a double-edged sword: Leverage allows traders to magnify their positions, potentially increasing profits, but it can also inflate losses. In the context of a funded account in a prop firm, traders can leverage the firm’s capital, reducing personal financial risk. However, understanding the implications and handling of leverage is essential for successful trading. 

Whether you’re an experienced trader or just beginning your journey, understanding the strengths and drawbacks of crypto is essential. We’ll explore different aspects of the crypto realm, including leverage, CFDs, and the role of proprietary trading firms, shedding light on the complexities and intricacies of this evolving landscape. Strap in for a comprehensive journey through the peaks and valleys of the crypto trading world! 

What Is Crypto Trading? 

Crypto trading is the art of capitalizing on the price fluctuations of digital currencies for financial gains. Unlike their conventional counterparts (fiat money), cryptocurrencies use a decentralized ecosystem, free (in part) from the control of governments or financial institutions. The backbone of these digital assets is the revolutionary blockchain technology, which provides a secure and transparent ledger for all transactions. When you engage in crypto trading, you’re likely either speculating on price changes through a CFD (Contract for Difference) trading account or directly buying and selling the actual coins on an exchange platform. Crypto trading enables you to take positions on the value direction of a cryptocurrency against traditional currencies like the dollar, or even against another cryptocurrency; the process is much like that of currency pairs in forex. 

How Does Crypto Trading Work? 

If you aim to trade crypto in your funded account, you should start your crypto trading journey by selecting a trustworthy platform. At FunderPro we use and recommend TradeLocker. Another possibility, not usually applicable to prop trading, is to use an exchange, where you can set up an account, deposit funds, and start buying coins. You can opt for a long-term approach, buying and holding your chosen cryptocurrency as an investment. Alternatively, you can engage in more frequent buying and selling activities, similar to day trading; this latter approach is more common among funded traders. In any case, conducting thorough research before making any investments or speculations is paramount, as different cryptocurrencies, such as Bitcoin, Ethereum, Litecoin, and many others, offer unique features and advantages, and help you diversify your portfolio and hedge risk. 

As we said, cryptocurrencies can be traded mainly in two ways. One common method is direct trading of the digital coins themselves on a crypto exchange using a digital wallet for buying and selling cryptocurrencies. Much like how you would trade on the stock market, you profit when you sell your crypto tokens at a price higher than your purchase price. The second method, common in the world of prop firms, is the use of derivative financial instruments like Contracts for Difference (CFDs). CFDs have gained considerable traction due to their lower capital requirements, which allow traders to speculate on price movements without actual ownership of the coins. Additionally, CFDs are leveraged instruments, meaning they enable traders to amplify their positions, potentially magnifying gains. However, it’s worth noting that while leverage can increase profits, it can also inflate losses. Another benefit of trading CFDs is that you don’t need a crypto wallet because you don’t hold the actual coins or own the underlying asset. We will look at crypto CFDs more in depth in the following paragraph. 

Crypto CFD: Cryptocurrency Trading in Prop Firms 

When considering prop firms and funded accounts, it is important to point out that CFDs or any other means of trading crypto (or any other asset) are heavily dependent on the business model and the broker adopted by the proprietary trading firm that is funding you. Specifically, if the firm keeps its funded traders on demo accounts, they are effectively acting as market makers, and you might find that your trades have different outcomes than they would under normal market conditions. If, on the other hand, your funded account is STP, like on FunderPro, the way all your trades are managed is up to the broker, and you should contact the relevant customer support teams to make sure that the processing is suitable to your needs and trading style. 

As we said previously, a CFD (Contract for Difference) enables speculation on the price shifts of cryptocurrencies without the necessity to own the underlying digital coins. You can place a long (‘buy’) position if you predict a cryptocurrency’s value will increase or go short (‘sell’) if you forecast a fall in value. Both methods use leverage, meaning you only need a small initial deposit—known as margin—to access full exposure to the underlying market; if you are trading on a funded account, you don’t even need that, since you will be trading the prop firm’s capital. However, it’s vital to understand that while leverage can increase profits, it can also boost losses. 

Trading cryptocurrency CFDs, particularly via the Direct Market Access (DMA) model, accentuates the benefits of leverage due to the significant price movements inherent in cryptocurrencies. Greater volatility offers more substantial earning opportunities for traders willing to embrace higher risks. As we saw, the execution of a CFD contract is carried out by a broker in the spot market, with the strike price being shaped by the market’s total liquidity. This is distinct from futures, where the price is influenced by supply and demand for the asset’s “expected” prices. It’s important for traders and investors familiar with CFDs on traditional assets like oil, gold, and fiat currencies to understand these differences when considering cryptocurrency CFDs. 

Benefits of Crypto Trading 

Cryptocurrency trading can present advantages over conventional investment and trading methods, with unique features making it an enticing arena for both seasoned and aspiring traders. With higher liquidity than many traditional assets, cryptocurrencies can be bought and sold with greater ease. This liquidity, combined with the low barriers to entry, makes it possible for individuals to begin trading with smaller capital investments. Cryptocurrencies, underpinned by blockchain technology, boast high levels of security, making transaction alterations or hacks nearly impossible. Further, cryptocurrencies offer a degree of privacy and anonymity unmatched by traditional investment avenues, as transactions aren’t linked to personal identifiers (although some concerns in this area still loom). 

1. Higher Volatility

The very nature of the relatively young cryptocurrency market, defined by significant volatility driven by speculative interest, is part of what makes it an exciting landscape for traders. For instance, the price of Bitcoin fluctuated drastically between October 2017 and October 2018, reaching highs of $19,378 and plummeting to lows of $5,851. This volatility, while presenting increased risk, also provides a range of opportunities for you to capitalize on both rising and falling market trends, given you’ve done your research and have a risk management strategy in place. 

2. Higher Liquidity

The cryptocurrency market, devoid of centralized governance, operates 24/7, with transactions often happening directly between individuals on exchanges across the globe. However, periods of market downtime can occur during adjustments to infrastructural updates or ‘forks’ of the blockchain. While the cryptocurrency market is generally considered illiquid due to the dispersion of transactions across multiple exchanges, trading cryptocurrency CFDs can provide enhanced liquidity. Prices are sourced from multiple venues, ensuring quicker execution of trades at lower costs. 

3. Leveraged Exposure

Leveraged exposure is another benefit of CFD trading. It allows you to open a position on ‘margin’—a deposit that is a fraction of the trade’s full value—enabling a large market exposure with a relatively small capital investment. While this can result in substantial profits, it’s crucial to remember that it can also worsen losses, potentially exceeding your initial deposit for a trade. This makes it essential to consider the total value of the leveraged position and have a robust risk management strategy in place, including suitable stops and limits. A solution to this is using a prop firm like FunderPro and obtaining a funded account, where you can trade with real capital and open a high-value position without risking your personal funds. 

4. Easy to Start

The process of trading cryptocurrencies with STP (Straight-Through Processing) accounts is faster and less restrictive compared to traditional exchanges. STP brokers are not market makers and forward your trades directly to liquidity providers, this effectively aligns your interests with those of the firm and safeguards you from market manipulation.  

When you use STP accounts, you don’t need direct access to the exchange, as they interact with the underlying market on your behalf. You don’t need to set up and manage an exchange account or store cryptocurrencies in a digital wallet. This means you can be set up and ready to trade in no time, thanks to simple and almost instant online verification. 

5. Good for Diversifying

One of the most important rules of trading or investing is to diversify your positions, to both increase potential returns and manage risk more effectively. Crypto trading, if understood and performed carefully, can further enhance your diversification strategies. First, it is another type of asset you are trading, and it could make up for losses you may suffer in other trades. Second, the cryptocurrency class has within itself many different coins and tokens that enable you to be more granular in your diversification and manage risk even more accurately. 

Disadvantages of Crypto Trading 

While the allure of cryptocurrency trading stays rightly potent for many, it can also bring along a host of risks. For one, even if backed by decentralized blockchain technology, there are concerns regarding privacy, as there have been instances that suggest that it may be possible to monitor crypto transactions. Let’s see some other potential drawbacks of trading cryptocurrencies. 

1. Cryptos Have a Bad Reputation

Cryptocurrencies have gained a reputation as tools for criminal activities, including money laundering and illicit purchases. High-profile cases, such as that of the Dread Pirate Roberts, who used cryptocurrencies to facilitate illegal drug sales on the dark web, highlight this issue. Additionally, cryptocurrencies are often employed in ransomware activities and other forms of cybercrime. 

Moreover, the decentralization ideal of cryptocurrencies often fails in practice. For instance, around 10,000 wallets control about 33% of the total available Bitcoin (but the number could be much lower, as one person could own many wallets) and 10% of the miners monopolize 90% of its mining capacity, indicating a high concentration of wealth. The mining of cryptocurrencies, which is theoretically open to anyone with a computer and an internet connection, is significantly energy intensive. The high energy costs and mining unpredictability have led to a consolidation of mining activities among large corporations. As a result, a mere 2% of Bitcoin blocks opened between December 29, 2022, and January 29, 2023, were by unknown addresses. 

In a nutshell, these issues may affect the price of crypto assets in ways that are hard to forecast, leading to higher risk. 

2. Security Concerns

This point interests mainly those who hold crypto directly but may influence the price of CFDs as well; for example, if a sudden security breach news comes out. While the blockchain technology underpinning cryptocurrencies is highly secure, off-chain crypto-related key storage repositories, such as wallets and exchanges, are vulnerable to hacking. Numerous instances have been reported where millions of dollars’ worth of coins have been stolen from hacked exchanges and wallets. 

In fact, storing cryptocurrencies securely is more complex than storing traditional assets like stocks or bonds. Keeping digital assets on exchanges exposes them to risks, including asset freezing due to government requests or bankruptcy of the exchange. While some prefer offline “cold storage” options, they come with their own set of challenges, like the risk of losing the private key needed to access cryptocurrencies. 

3. Price Volatility

We listed this as an advantage, but price volatility can just as easily turn into a downside of cryptocurrency trading. Cryptocurrencies like Bitcoin have experienced sudden surges and crashes in their value, leading many to view them as short-lived fads, assets for Ponzi schemes, or speculative bubbles. The huge cost of producing cryptocurrencies, primarily through electricity consumption for mining, further worsens this issue. 

4. Regulatory Uncertainty

Regulatory restrictions also pose challenges for cryptocurrency trading. The lack of formal regulations by central governments introduces added risk until cryptocurrencies receive similar regulatory treatment as fiat currencies. 

5. Coins May Just Disappear

The failure of crypto projects looms large. With fierce competition among thousands of blockchain projects, only a small percentage will succeed. Regulatory crackdowns on the entire crypto industry are another potential risk, especially if governments perceive cryptocurrencies as threats instead of innovative technologies. 

The technological elements of cryptocurrency, while innovative, increase risks for investors due to the still-developing nature of the technology itself, which hasn’t been extensively proven in real-world scenarios, introducing an element of uncertainty in crypto investments. 

Is Trading Crypto Worth It in Prop Firms? Answering the Million-Dollar Question 

In summary, crypto trading can be extremely rewarding and yield hefty profits, but it is not for the faint-hearted and, like any other trading activity, can’t be taken lightly. It demands a solid understanding of the market, the ability to track and analyze market trends, and a higher-than-usual risk tolerance compared to traditional markets. 

Crypto can be an integral part of a good diversification and hedging strategy, but it needs to be traded carefully. Moreover, it’s essential to remember that crypto trading can lead to losses of invested capital and may not be suitable for everyone. 

Ensure you are financially equipped to handle potential losses before venturing into this volatile space. If you trade crypto on your funded account, make sure to foresee a worst-case scenario that doesn’t pull you below your drawdown limits. 

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