CFD is a rather unknown term for an exclusive cryptocurrency trader. It is more in common with other traditional asset traders around the markets. The meaning of the term is “Contract for Difference”. They are usually used by specialized brokers around the world, to provide various assets on their platforms.
Now, why are they a relevant topic for cryptocurrency traders? Well, the fact is that CFD brokers are now offering crypto CFDs as well. It is only natural to ask, which trading strategy is better than the other. In fact, the question arose most commonly in South Africa. You see, South African forex brokers listed here started to offer Bitcoin and Ethereum CFDs en masse and people got quickly accustomed. The reason was quite simple. The percentage of crypto holders in the country was more than any other, according to a recent survey. Therefore the financial service providers jumped at the opportunity.
Crypto CFDs and their applications
The primary feature of a CFD is the fact that it is not the real deal. For example, if you buy a Bitcoin CFD, it doesn’t mean that you are actually buying Bitcoin the cryptocurrency, you’re buying a contract about its price.
So we have a couple of options to trade cryptos already aligned, which is better? To trade with Crypto CFDs, or to trade on the good old exchanges? Let’s discuss that through advantages and disadvantages.
Leverage – advantage
Leverage could also be a completely foreign world for crypto traders. There were some cases where large exchanges like Binance was offering leverage to its customers, but right now there is no trace of it.
Basically, leverage is borrowed money. To go into more detail let’s bring an example. Let’s say that you have $100 on your account. You enter a trade with that deposit and utilize the leverage offered by your company, let’s say it’s 1:10. By using that leverage on your initial investment, you are able to increase your trade size by 10. If the leverage was 1:100, you’d be able to increase it by 100, so you see the pattern. Now you are trading with $1,000 thanks to that 1:10 leverage. At the end of the trade, you need to return all of the money “given” to you by the company plus a little bit extra. Still, you’d be able to pocket way more profit than if you were trading with your initial deposit. Cryptocurrencies themselves, as already mentioned, very rarely come with leverage, about a max of 1:2. But with CFDs, it could be as large as 1:10 or even 1:100.
Security – advantage
Security is always a controversial topic with cryptos. After all of those massive hacks, some traders were actually so discouraged that just abandoned the market. CFD brokerages are far more reliable when it comes to security, compared to crypto exchanges. For one thing, they are far less likely to be targeted, and even if they are, the security is on a completely different level.
Furthermore, if the CFD company fails to protect your assets, they would have to answer to their regulator, which in turn, will compensate for your loss.
Ownership – disadvantage
As already mentioned, Crypto CFDs are not cryptocurrencies themselves. They are just contacts on a certain price-point. This means that although you may have a portfolio of $2,000 worth of Bitcoin CFDs, you don’t own even a fraction of the coin. This has some issues.
First things first, is the freedom of transportation. When a coin is on your wallet, you can pretty much take it anywhere you want and actually use it as a means of payment. The CFD is just a contract that can only be sold on a specific platform.
You don’t get to become a market-maker. Some coins are so small in price and market capitalization, that a single individual can become a market-maker. Meaning that you buy-up so much that you can influence the price at a drastic measure. With CFDs, that is out of your control.
Finite positions – disadvantage
Crypto CFD trades have an expiry date. Usually a week or so. Even if the position at the time of the deadline is not profitable, it will still close. Sure you can extend it, but that costs quite a significant amount.
With cryptocurrencies themselves, you can hold on to them virtually forever and only trade them when the time is right.
Variety – disadvantage
Crypto CFDs don’t come in all shapes and sizes. In most cases, you’d find CFDs on Bitcoin, Ethereum, Dash and Litecoin. Therefore your portfolio is quite restricted right from the get-go.
Cryptocurrencies themselves don’t offer a lack of variety what so ever. You can have hundreds of different coins on your wallet.
As you can see the choice is extremely hard to make. On one hand, you have enhanced trading capabilities through leverage and security. But on the other hand, you carry large risks of not diversifying your portfolio and pretty much alienating yourself from the whole Blockchain industry.
The decision is yours to make here, there are no real recommendations as to which is preferable. The only things to consider are the advantages and disadvantages listed above.
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