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Cryptocurrencies have established a firm position in the financial markets, becoming an asset of choice for many investors. Their attractiveness can be explained by several factors such as high liquidity, anonymity, and decentralization. The digital money is traded on cryptocurrency exchanges working on which require special knowledge about the technology involved. So, getting started on the cryptocurrency exchange can be a tough challenge. An alternative way is trading cryptocurrency CFDs.
What is CFD?
CFD stands for Contract for Difference. It is a financial derivative product that serves as a contract between a trader and a broker. When you enter into a CFD deal, it means that you anticipate certain price differences in the future. In the case of cryptocurrency CFDs, you anticipate the difference in prices of cryptocurrencies. At the same time, trading CFDs, you do not own the underlying asset, i.e. the cryptocurrency. Thus, you are exempt from any subsequent obligations such as getting a crypto wallet.
How are crypto CFDs different from cryptocurrency exchanges?
Buying and selling
The famous method “Buy low, sell high” works with CFDs in both directions. Thus, you can profit not only from Buy deals when the price rises but also from Sell deals when the price falls. Owning a cryptocurrency would not provide you with such an opportunity as you can gain only if the value of your asset increases.
Leverage
CFDs are leveraged products. Leverage is a tool allowing traders to use funds borrowed from a broker to open bigger positions with a relatively small capital outlay. For example, using 1:5 leverage, you can spend the sum 5 times lower than the actual cost of an asset. Although leverage can magnify profits, it can also magnify losses. In times of high volatility and intense trading, a drastic price move against a trader’s position can result in significant losses up to a total deposit amount. At the same time, you can reduce these risks and opt for 1:1 leverage. It will allow you to hold your positions for a longer term and pay no swaps on long positions.
Hacking risks
Even the best and most reliable crypto exchanges face hacking risks. There have been several cases when exchanges in different countries suffered security breaches. Some of them are the Singaporian KuCoin exchange, Eterbase, and Binance, one of the biggest crypto exchanges. CFD trading entails no hacking risks as you don’t actually own a cryptocurrency, therefore there is nothing to be stolen.
Deposit limits
Many cryptocurrency exchanges have limits on how much you can deposit, while accounts can be very expensive to maintain. CFD brokers are more flexible in this regard. Some of them impose no limits on the maximum deposit.
Choice of assets
Guess what can be traded on a cryptocurrency exchange? An obvious answer is cryptocurrencies only. Opting for CFD trading, you will have a wider choice of underlying assets that may include, apart from cryptocurrencies, forex, commodities, indices, or energy futures.
Speed
Cryptocurrency transactions based on blockchain technology tend to be somewhat slower than the ones processed by CFD brokers. Higher speed allows traders to react faster to any volatile shifts in the market which is a sound reason for opting for CFDs trading.
Customer support
Most CFD brokers strive to provide their customers with high quality and timely support. Some brokers even offer personal account managers. In the case of cryptocurrency exchanges, the support is not that prompt. If you need immediate solutions, you can be disappointed by a slow service.
Key takeaways
Here are the main features of cryptocurrency CFDs that distinguish them from crypto exchanges:
How to start CFD trading?
Nowadays, many brokers provide CFD trading services. So, the first thing you need to do is to choose the broker that you will work with. The choice is vast indeed, and you need to pay attention to the following criteria.
Regulation and reputation
A reliable and trustworthy broker is the one that is regulated. Moreover, clients of the brokers that participate in the Investor Compensation Funds are eligible for compensation in case of the broker’s insolvency. Clients’ reviews also can tell you a lot about the quality of a broker’s services.
Trading costs
Brokers should be transparent about their pricing and charge no hidden commissions. The size of spreads/fees also matters.
Execution
In trading, every second is precious. A good broker should provide a flawless connection and fast execution with no delays and disruptions.
It is also worth paying attention to a broker’s additional services. For example, InstaForex provides a unique system for copying deals - ForexCopy. Participants of this system can copy deals of other traders or provide their deals for copying. This service can prove to be useful for those who need to improve their skills by watching as experienced traders’ deals are copied to their accounts. Importantly, copying deals on cryptocurrency CFDs is available within the ForexCopy service.
As soon as you make your choice, you need to register a live trading account with the broker, get verified, and make a deposit. After setting up your trading platform, you can start trading cryptocurrency CFDs.
Bottom line
All those points of the comparison indicate that trading cryptocurrency CFDs obviously has advantages over trading on crypto exchanges. Of course, the decision about which way of trading cryptocurrencies to choose depends on your particular situation and investment needs. Do you intend to own the digital money or just profit from the difference in prices? Do you need support from the broker throughout the process? Would you like to avoid hacking risks? Answering these questions will help you make your choice.
