Is It Better to Trade CFDs on Crypto or Crypto Itself?
Cryptocurrencies are not something new, and neither are CFDs (i.e. Contract For Difference, a popular form of derivative trading). Every person involved in financial trading will know what these two assets are, but some are still unaware that cryptocurrencies can be traded through CFDs, and now may be the best time to do so.
There are a few advantages and disadvantages connected to trading CFDs on cryptos compared to regular cryptos and both traders sometimes get confused as to why somebody would choose the opposite option. Most of those “confused” traders are crypto enthusiasts who try to drive the market as well as pocket some profit in the process.
Trading cryptos with CFDs do not move the market whatsoever even if we enter a $1 billion position. Why? Because crypto CFDs are not actual cryptocurrencies. When you open a position, you are not buying the cryptocurrency, you are buying a contract on the price it is at currently. If the prices go up, you can simply sell the contract and receive profits much like you’d receive them on any crypto exchange.
Let me tell you some key differences between these two trading strategies by outlining the advantages and disadvantages of crypto CFDs.
Crypto CFD advantages
Before we move to highlight the advantages, I’d like to note one thing that these are not “call to action” paragraphs, these are here to simply give you information of what you could be doing with a tradeable asset. In the end, it will be up to you to make a choice, so take everything with a grain of salt.
Margin trading
Margin trading is something unique for cryptocurrency CFD providers. They are the only ones who can afford to do this, although large exchanges such as OKEx and Binance are starting to implement the feature on their platforms as well.
However, when cryptos became a hit back in 2017, the CFD brokers were the first to introduce such a trading strategy, and not many understood why some crypto traders switched to the other side.
The reason was simple. Margin trading platforms are able to provide leverage on your trades, meaning that every trade you open will receive additional funds from the brokerage.
Let’s explain.
Imagine that you’ve just opened a position with $100 and you are trading Bitcoin. Let’s say that Bitcoin grows by about 50%, you get $150 in the end right? $50 as profit.
With a CFD position, that trade would have leverage added to it. Let’s say the max leverage is 1:10. That means that your $100 position has just been turned into a $1000 one. If Bitcoin rises by 50% again, you get $1500 instead of the $150 before leverage.
At the end of every trade, the trader is responsible for returning all the “borrowed” funds from the brokerage. Since you had $100 and your trade was turned into $1000 thanks to the 1:10 leverage, you need to return $900 to the broker with an added $50 from your profits. Still, you’re left with $450 generated from a trade you started with $100, that gives you a 450% increase on your deposit.
This was exactly why traders quickly switched to CFD brokers while crypto prices were still going upwards. Needless to say, most of them walked away with quite a lot in their pockets.
Liquidity
The liquidity of CFDs is much better than cryptocurrencies. You see, if you’re trading an altcoin, something that does not have a direct cash out system, you’re forced to switch to BTC and then withdraw from either an offline ATM or through an exchange which will ask quite a lot in return.
A CFD is basically fiat currency itself and does not need conversion into USD or EUR. You can simply request a withdrawal and the broker will approve it. With cryptos, it’s much more complicated as you have to have a wallet, then transfer to that wallet, then transfer to the exchange and then finally withdraw. Plus you’ll have to do a lot of conversions.
Furthermore, there are limits to how much you can withdraw within 24 hours for cryptocurrencies. This system creates a risk that a bear market can hit and your $10,000 that you have remaining on the account will turn into $5000 overnight (it has happened before).
On CFD brokerages, you simply have fiat on your account, so it does not carry the same danger even if there are daily withdrawal limits.
Security & license
There have been very few cases when a CFD platform was hacked and funds were stolen. However, crypto exchanges are subject to multiple hack attacks nearly every day, therefore there’s much more risk for keeping your assets there. That’s why people use cold wallets to store their tokens outside of the exchange.
When you trade crypto CFDs, your account is your wallet, as it is never in danger of a hack attack.
Furthermore, CFD brokerages are always licensed by local financial regulators. Which means that every customer has local laws to protect their interest. Should something happen on the platform which caused you monetary damage, the broker is required by law to compensate you.
Most crypto exchanges and companies do not have this obligation. Mt.Gox customers learned this the hard way.
Unfortunately, this is where the advantages stop for crypto CFDs and the disadvantages start.
Crypto CFD disadvantages
Ownership
The very first disadvantage is the essence of CFDs themselves. When we trade cryptos through CFDs we don’t actually use real cryptocurrencies, as mentioned in the beginning. We simply speculate on the price on a platform that will reward us if we’re correct.
Therefore, if you ever trade a crypto CFD for a security token, you won’t be able to affect the market in any way shape or form. Furthermore, you don’t have the opportunity to diversify on the spot. You’ll have to withdraw the funds first and then invest somewhere else if the platform you’re using is not to your liking anymore.
Higher costs
Margin trading can rarely be long-term. Most people close their positions within a couple of days and crypto CFDs are not an exception.
When opening a position with the CFD, you are given a deadline. If you don’t close the position before that deadline, the platform will close it for you, even if it causes you to lose money. The only way to extend the deadline is to pay a fee, which could sometimes be as high as 1% of your position.
Because of such restrictions, CFD traders cannot enter long-term positions with cryptos. By the time they’re ready to close the position, they’ve paid more in fees than they’ve gained from the trade. Crypto traders, on the other hand, can simply move their funds out of the exchange and onto their cold wallets and simply relax and wait for the right time to sell.
CFDs tend to give you that sense of urgency when you trade them, therefore emotional trading is a much bigger risk.
Few choices
The CFD brokerages need to think about their profits as well. They can’t simply allow easy traders that guarantee high returns now can they? In order to keep this under control, they neglect to provide more than a few crypto CFD options.
The CFDs you’ll usually see are BTC, ETH, XRP, BCH and maybe LTC.
These coins may have been the best-performing ones in the past, but right now, most of the gains are happening with newer tokens that cost $1 or less. Therefore you’d still have a lower margin for profits.
Competition
As already mentioned above, some crypto exchanges such as OKEx and Binance have already considered adding margin trading with cryptocurrencies on their platform.
OKEx has already tested the feature, while Binance is developing it right now. This could be the death of CFDs on cryptos as their primary advantage was the leverage they offered to the traders.
Now that crypto exchanges will have that feature, very few traders will even consider switching sides.
Furthermore, margin trading real crypto has a lot of potential to drive the market forward, by simply increasing the trading volume, and everybody wants to play market-maker.
Outlining the end product
Overall, these two trading strategies have their pros as well as their cons. As it may be confusing to remember them all, let’s create a nice comprehensive list here in the end:
Pros:
- Leverage
- Security and License
- Liquidity
Cons:
- Costs
- Variety
- Ownership
Overall, it can be said that CFDs are better for short-term trades, while cryptos are much more effective in the long-term.
About the Author: Karnika E. Yashwant (KEY) is a multi-awarded CEO of a dozen brands. He has been advising blockchain projects since 2013. Disclaimer: The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of NewsBTC.
The post Is It Better to Trade CFDs on Crypto or Crypto Itself? appeared first on NewsBTC.
OhNoCrypto via https://www.ohnocrypto.com/ @Guest Author, @Khareem Sudlow
