Most people are aware of the general idea behind trading cryptocurrencies for a profit. You buy a cryptocurrency when the price is low and then sell it when the price rises, earning yourself a profit. However, you may not have heard of or understand trading cryptocurrency CFDs. This is a method of trading that lets you benefit from price fluctuations in cryptocurrencies without having to own them.
More and more fiat brokers offer support for a limited number of crypto CFDs, so this is no longer a rare asset type. But that does not necessarily mean it is a better option than owning cryptocurrencies. As you take a closer look at trading cryptocurrencies directly versus trading cryptocurrency CFDs, the advantages of trading cryptos directly will become clear.
Since the idea of a CFD is somewhat unfamiliar to the average person, take a few minutes to ensure you fully understand what a crypto CFD is before comparing it to directly trading cryptocurrencies. The term CFD stands for contract for difference. CFDs are a type of financial derivative that acts as a contract between you as the trader and the brokerage company you choose to work with.
With a CFD, you do not own the underlying asset, in this case, cryptocurrency. You just have the right to the difference in its price. You predict whether the asset will rise or fall in value and choose the appropriate CFD contract type. If you make an incorrect prediction, then you must pay the associated loss. If you make a correct prediction, you earn the associated profit. In either case, the profit or loss is the amount of change in the value of the asset times the quantity. Because you do not own the underlying asset in a CFD, most brokers only require a margin of a certain percentage of the value of the asset (with value as quantity times the price).
CFDs for cryptocurrency are relatively new since crypto is among the newest financial instruments. You can also find CFDs for shares, forex, indices, and more.
Use of Leverage and Margin Requirements
One of the significant differences between trading cryptocurrencies directly on a crypto exchange and doing so via crypto CFDs is the ability to use leverage with CFDs. Leverage and margin requirements are closely related, and while they are an option for crypto CFDs, they are not for regular cryptocurrency trading.
Leverage is the ability to use the capital you borrow from the broker to increase the amount of your trade. With leverage, there is a margin requirement or a percentage of the entire value that you must pay. Essentially, leverage lets you trade much more cryptocurrency than you would be able to buy outright. Available leverage can vary greatly by broker and regulations within your jurisdiction, but this is something that crypto CFDs have while regular cryptos do not.
The potential benefits of leverage for a crypto CFD are obvious. After all, you can trade multiple times the amount of a certain crypto than you would be able to if you had to buy it outright. However, there is a downside. As you add leverage, you also increase your potential losses.
For example, let’s say you trade a crypto CFD for Bitcoin with leverage of 50x. If you get a profit, it would be 50 times the amount you would make if you had just purchased the crypto outright and then sold it. But if you make the wrong prediction, your losses will be 50 times what they would if you had purchased the crypto. The potential losses associated with leverage can be a significant negative and mean that trading crypto CFDs with leverage requires a great deal of caution.
Based on the previous point, it should be fairly clear that there is a greater risk associated with trading cryptocurrency CFDs compared to regular cryptocurrencies, assuming you do use leverage. Keep in mind that the risks with CFD trading are multiplied by your leverage. When this is added to the already volatile market of cryptocurrency, you should use extreme caution before trading crypto CFDs.
There are a few unique tools that allow you to minimize risks when trading crypto CFDs as well as cryptocurrencies on certain exchanges. A stop loss order will automatically close the position at a certain point to limit your losses. Take profit orders perform a similar function, but lock in the profit before the crypto’s price begins to decline. Whether or not these and other similar risk-management features are available will depend entirely on the crypto exchange and the crypto CFD broker.
Regulation is a mixed bag when it comes to trading cryptocurrency versus crypto CFDs. Neither of these assets is regulated as thoroughly as stocks. There is minimal regulation for cryptocurrencies, cryptocurrency exchanges, crypto CFDs, and CFD brokers. Some jurisdictions place limits on the amount of leverage that can be offered for crypto CFDs, but that is frequently the extent of regulation.
As such, no matter which of these two trading methods you choose for cryptocurrency, you will need to do your research. Make sure your asset predictions are backed by evidence and choose a crypto exchange or crypto CFD broker with a strong reputation. That being said, the brokers that offer crypto CFDs do typically have regulators watching and authorizing them for other instrument offerings, just not necessarily CFDs, particularly crypto CFDs.
Short or Long-term Investment
Those with trading experience will likely notice that the ideal length of your trade will vary for cryptocurrencies versus crypto CFDs. Crypto CFDs tend to be more popular for short-term trades. That is because there is almost always a swap fee associated with keeping a CFD position overnight. Because of this fee, it is costly and impractical to use crypto CFDs for long-term trades.
By contrast, you can trade cryptocurrency for any amount of time you wish. You just need to make sure that your purchase clears before you can sell it, which will usually just take a few blocks. As such, you can use direct crypto trading via an exchange for any strategy, whether it is short-term or long-term. By contrast, you should only trade crypto CFDs as part of a short-term strategy.
If you do plan to make a day trade for cryptocurrency, then some experts may suggest that you opt for crypto CFDs instead of cryptos via an exchange. This is due to the lower spreads for CFDs compared to those on exchanges, in most cases. The caveat is that the spread will always vary by exchange and broker, so CFDs do not automatically have better spreads than cryptos. Additionally, the significant increase in value typically offsets the slightly larger spreads associated with directly buying and selling crypto.
One area of trading in which crypto CFDs do have a slight advantage is liquidity. If you decide to trade a less common altcoin, then you would have to go through several steps to get fiat from it. You would likely need to first trade it for Bitcoin and then could convert it to fiat. By contrast, CFDs are already fiat, so you would just need to close the order to get your fiat.
Ability to Change Exchanges or Brokers
To make up for the slightly lower liquidity of crypto compared to crypto CFDs, consider the following cases. A crypto exchange or a broker may decide to change their general policies at some point or begin offering worse prices. If this happens, you will find it much more complicated to move your crypto CFDs to another broker than you would to move the crypto to another exchange.
In the case of a cryptocurrency CFD, you would have to first sell or close your CFD position. Then, you have to wait for the funds to clear and become available to you. From there, you can withdraw them, which can take days and have limited methods available. By contrast, if you want to switch the exchange where you trade crypto directly, all you have to do is send your crypto to the new wallet address. This transaction will be completed quickly, with the time frame depending on the particular crypto.
Range of Assets to Trade
If you want to trade Bitcoin, Ethereum, or another highly popular cryptocurrency, then you will likely be able to do so with either direct crypto trading or trading of crypto CFDs. However, if you want to diversify your crypto portfolio, you will find hundreds to thousands of additional options by directly buying crypto instead of trading crypto CFDs. Brokers are expanding their offerings of crypto CFDs, but you will still be hard-pressed to find one with more than 10 choices.
In contrast, the typical exchange offers at least a dozen crypto pairs, if not hundreds. There are thousands of cryptos you could potentially buy and trade if you know where to look. This means that in terms of the sheer range of assets you can invest in, trading crypto directly has a significant advantage.
Is Owning a Crypto a Pro or Con?
One of the biggest differences between a cryptocurrency and a cryptocurrency CFD is whether or not you own the cryptocurrency. Those who favor crypto CFDs say that the fact that you do not need to own a crypto is an advantage. According to them, getting a crypto wallet is a time-consuming hassle and requires taking the time to understand how crypto wallets function.
From a realistic standpoint, however, getting a cryptocurrency wallet and learning to use it do not take long at all. You can set up a crypto wallet in a matter of minutes, and the numerous online guides to wallet types will make it easy to choose the type and specific wallet you want. Using wallets is also easy to understand, something that should take minutes for the average person to learn at least to a level required for crypto trading. Furthermore, buying the initial crypto to trade is easy thanks to the wealth of fiat-to-crypto exchanges. You will even be able to buy your crypto in a matter of minutes with your choice of payment method.
Thanks to the ease with which you set up a cryptocurrency wallet, the fact that you must own crypto to trade cryptocurrencies on an exchange but not with a CFD only gives crypto CFDs a very minor advantage.
This is overwhelmed by all the advantages associated with actually owning a cryptocurrency. You can only take advantage of everything that cryptocurrencies have to offer by owning them. What if you want to use cryptocurrency to pay for something? This would be particularly problematic if you want to purchase a service only available in crypto or if you want to invest in an ICO. If you already own cryptocurrency, there is no need to take the time to set up a wallet and purchase some to use those services.
Summary of Why Trading Crypto Is Better
After all those points of comparison, directly trading cryptocurrency on an exchange clearly has multiple benefits over trading crypto CFDs. Crypto CFDs offer the ability to use leverage, but this is the main point in their favor. When you take a closer look, even the lack of need to own the underlying crypto is not a real advantage. By contrast, directly buying and selling cryptocurrency:
Because of all those advantages, it makes more sense to go ahead and own cryptocurrency directly. Of course, the decision will depend on your particular situation, but most people will be better off trading crypto directly, especially if they are unfamiliar with using leverage. Trading crypto directly not only lets you profit from its volatility but also lets you use the crypto as its creators intended, as a digital currency.
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