Trading Digital Assets with Wallets vs No Wallets: Explained
Crypto derivatives or spot assets, have arguably grown much more popular over the last decade – Especially in the case of digital crypto-derivatives assets.
Derivatives serve as contracts that extract value based on the performance of an underlying asset or variable. In the case of Crypto-derivatives, these two-way currency derivative contracts can be considered risky (as all investments are, to some degree), however, they also naturally serve many beneficial purposes both to the trader and the markets.
Crypto derivatives, typically conducted in US dollars, are a beneficial tool in a portfolio’s risk management, as the trader can use them to hedge against illiquid currencies. They can also help to leverage exposure and ease entry into the market.
With an understanding of the concept of derivatives, which have existed for decades, we can now imagine the traditional two-way currency derivative contracts in a more modern mentality: Financial instruments tied with digital currencies. For example, Tesla (TSLA) and Bitcoin (BTC).
Now we have opened a new door to the world of financial trading. With the emerging digital asset class comes also the discussion of how to store such assets. Some brokers provide proprietary wallets for traders which have proven to be far from secure.
So, what other options are there? We will discuss and compare the options in this article, giving you further education to make the best decision in your trading activity.
Option 1: Storing Digital Assets in Online Wallets
For digital asset traders, the most common option for storing their assets is the online wallets of the exchanges they use.
While this option could be easy or convenient, there are a lot of risks that go along with it, outside of the trading activity itself.
Before we get into that, let’s first provide more explanation of the differentiation of crypto assets which would be stored in these types of wallets.
Digital assets, for example, Ethereum or Bitcoin, would typically be stored in online wallets offered by an exchange for the primary reason that when purchasing these digital assets, you are actually owning the underlying asset.
So if you decide to spend $100 on BTC via a typical exchange, you would literally own that $100 portion of the BTC asset. The wallet keys, which are the cryptographic string of characters, are the unique keys that allow you to access your crypto assets, whether you want to trade, send or buy with those funds.
In the case of crypto derivatives, if we refer back to the beginning of the article, this is a currency swap contract; you are not owning the underlying asset, but instead, a derivatives contract based on an agreed price exchange rate.
It is understandable how the novice trader can confuse the two types of asset classes, so it is important to explain the differences.
As mentioned, storing digital assets in an online wallet is certainly convenient, but given the associated risks, it may not be the ideal solution.
First off, storing actual crypto assets within online wallets on exchanges is incredibly risky and should be avoided at all costs. As you may be aware, there have been many cases of hacks and attacks on companies like Binance or FTX, where millions to billions of dollars in crypto assets have been stolen. Given how these assets were stored in the first place, there is no chance of recovery for the original users.
Aside from these threats and vulnerabilities, the lack of maturity of these exchanges and digital assets themselves make regulation and hence protection next to impossible.
Option 2: Storing Digital Assets in Fiat Bank Accounts
Given the nature of derivatives, the trader is never owning the underlying asset of the digital asset trades, as they take the form of contracts.
As with a regulated broker like Cerus Markets, all of a trader’s ongoing contracts and profits within the account are secured in segregated fiat bank accounts with reputable US banks, giving further protection and security.
Traditional fiat banks may be frowned upon by the crypto culture, however, in the case of short-term traded derivatives, this is absolutely the most secure way to trade using cryptocurrency against traditional instruments like stocks.
Additionally, it is important to point out that some crypto exchanges are not regulated, posing possibly the biggest risk to a trader’s activity. Without a governing regulatory body, there is simply no protection of funds if accounts are subject to hacking.
Most if not all regulated brokers provide some level of account protection or insurance, all dependent on the regulating body. Cerus Markets, for example, is regulated by Labuan FSA, which is under the Ministry of Finance in Malaysia. With their stringent regulations, it is next to impossible for traders to lose their funds with any activity breaches.
While it should be understood that owning the actual crypto assets is a completely different scenario in comparison to trading crypto derivatives, the most important point to note is the differences between the two options in terms of security.
The most important aspect of investing, trading or any given financial activity is arguably risk management, meaning this aspect should be your first consideration before you embark on any kind of trading or investing activity.
Risk management includes many aspects, such as loss tolerance, trading strategy, and overall money management, but above all of these points, it is generally recommended to always first register with a broker which is regulated. This step alone can prevent many risks upfront, with others being dependent on an individual basis.
If you’ve yet to register with a regulated broker, you may consider Cerus Markets, which is both regulated and also secures funds via segregated US-based bank accounts. Trading with Cerus Markets allows the trader to gain exposure to the growing cryptocurrency and trading market, with the option to tie crypto derivatives to traditional instruments via various digital assets.
As we like to say at Cerus Markets, there is always a bull market somewhere. Start your own secure trading journey with us today.