Many people are already familiar with the idea of trading Bitcoin and other cryptocurrencies. This typically involves buying a cryptocurrency when the price is low and selling it when the price rises so you earn a profit. While trading on an exchange i.e. spot trading, has been around for some time, the idea of trading cryptocurrency CFDs has more recently come about. Crypto CFDs enable traders to take advantage of cryptocurrency price fluctuations without the need to own them. Those who are in favour of crypto CFDs say that the fact that you do not need to own any crypto is an advantage, and for this reason it is not surprising that CFD trading has attracted a lot of interest, but is this a better option than actually owning cryptocurrencies?
Crypto CFDs
A CFD (contract for difference) is a type of financial derivative which acts as a contract between the trader and the brokerage. In the case of crypto CFDs, the trader does not own the digital currency in question. Instead, he tries to make a profit from price movements by predicting whether his chosen crypto will rise or fall in value. A correct prediction will earn him a profit. If his prediction is wrong, he has to pay the associated loss. The profit or loss is the amount of change in the value of the asset multiplied by the quantity, with a small percentage being paid to the broker as a fee for the service provided.
One of the main differences between crypto spot trading and trading crypto CFDs is the ability to use leverage with CFDs. The potential benefits of leverage are clear as traders are able to trade multiple times the amount of their chosen crypto compared with buying it outright. It should also be noted, however, that as leverage increases, any potential losses may also rise.
There are other advantages associated with crypto CFDs. All the top cryptocurrencies including Bitcoin and Ethereum are volatile, and for some people dealing with this level of volatility for the purpose of day trading is too much to handle. With CFDs you can be more flexible in your trading, have an opportunity to quickly get in and out, use stop loss orders and develop hedging strategies. This is where the trader can get an edge as the affordability and flexibility of CFDs, along with the various cryptocurrency rates and quotes in USD or other cryptocurrencies offer ways to hedge and limit excessive market risk.
Crypto Spot
That said, directly trading cryptocurrency on an exchange also has benefits over trading crypto CFDs. Directly buying and selling cryptocurrency allows you to profit from its volatility and presents a lower risk due to no leverage and works for short or long term trades. There are also no overnight fees for holding positions long-term, you can use your crypto for purchases and more. This method may also be preferable for those who are not familiar with using leverage.
Evidence shows that crypto CFDs tend to be more popular for short-term trades as there is usually a financing cost associated with keeping a CFD position overnight. This can make it less cost-effective to use crypto CFDs for long-term trades. In contrast, it is possible to trade cryptocurrency for any amount of time you wish via an exchange for any strategy, whether for a short position or a long term trade.
In essence, both crypto spot and crypto CFDs both have their benefits and drawbacks, but both nevertheless provide a potentially lucrative way to benefit from the success of cryptocurrencies. The final decision as to which is best will depend on the individual’s personal preference and financial situation.