From the time cryptocurrencies were invented, the majority of people trade cryptocurrencies through crypto exchanges where they have to physically own and store cryptocurrencies and also physically exchange the cryptocurrencies. For example, if someone wants to exchange Ethereum (ETH) for Bitcoin (BTC), the person will require to first own ETH and then send it to someone who owns BTC for exchange.
However, nowadays, traders and investors can profit from trading cryptocurrencies using contracts for difference (CFDs). With time, financial market brokers are slowly adapting cryptocurrencies and including them in their list of tradable assets and traders can now do cryptocurrency CFD Trading.
In this article, we are going to look into the basics of cryptocurrency CFD trading. We will cover a number of topics like:
- What is the difference between trading cryptocurrencies using CFDs and cryptocurrency exchanges?
- How does cryptocurrency CFD Trading work?
- Choosing the best cryptocurrency CFD trading platform.
- Advantages and disadvantages of cryptocurrency CFD trading.
Cryptocurrency CFD Trading vs. Cryptocurrency Exchange
To start with, the platforms upon which cryptocurrency CFD trading is carried out is totally different from the cryptocurrency exchange platforms.
Cryptocurrency exchanges only have charts indicating the prices of different cryptocurrencies in relation to the base cryptocurrencies of the exchanges while in cryptocurrency CFD trading platforms, the charts normally indicate the exchange rate of a pair of cryptocurrency and a fiat currency.
In cryptocurrency CFD Trading, retail traders and investors are able to profit from cryptocurrencies without actually owning the cryptocurrency tokens/coins. But when trading cryptocurrencies through cryptocurrency exchanges, traders are first required to go through the tiring process of acquiring the specific cryptocurrency token/coin that the trader wants to use. Also, the exchanges involve physical transactions of the cryptocurrency tokens from one crypto wallet to another.
Therefore, in cryptocurrency CFD trading a trader is not required to open a cryptocurrency wallet for storing cryptocurrency tokens as compared to when using the cryptocurrency exchanges.
When trading cryptocurrencies through the exchanges, there are transaction fees charged per every transaction, however, in cryptocurrency CFD trading, since there is no crypto coins transaction, there are no transaction fees involved.
How Cryptocurrency CFD Trading works
Cryptocurrency CFD trading is very simple compared to the common cryptocurrency trading via the crypto exchanges.
Firstly, a trader will have to look for a CFD broker who has listed cryptocurrencies for trading. Currently, there are only a handful of CFD brokers who have listed cryptocurrencies as tradable assets on their trading platforms.
Then the trader will have to open an account with the CFD broker and deposit an amount of funds into the account. The amount will depend on the amount of money he trader has at his/her disposal for trading.
Note: the deposit is purely in form of a local currency like US dollar, Great British Pound (GBP) or any other currency that the CFD broker allows as a base currency.
With a funded trading account, the trader can speculate on the movement of the exchange rates and open short and long positions involving cryptocurrencies.
For example, the trader may opt to go short on a BTCUSD pair. Meaning, he/she has opened a sell contract with the broker on BTCUSD. And depending on the market price speculation, if the exchange price drops and the trader exits the contract at a lower price, then he or she will have made profits.
The trader trades on the exchange rates between the currencies included on the pair. The trader does not own the involved cryptocurrencies at any point. He or she trades on the price changes only.
Best Cryptocurrency CFD Trading Platform
Cryptocurrency CFD trading platforms are provided by CFD forex brokers. You will, therefore, be required to choose a broker who will, in turn, offer you the platform to trade cryptocurrencies using CFDs.
Therefore, you will have to decide on the type of broker you want; a Dealing Desk or a No Dealing Desk.
Then you will have to take the following factors into consideration when choosing the best cryptocurrencies CFD broker:
- The reputation of the broker when it comes to cryptocurrency CFD trading. Here you can look for awards and publicity that the broker gets from the trading community.
- The history of the broker. When it was founded. And most specifically when the trader starts offering cryptocurrency CFD trading. It is always advisable to invest in a broker who has been in the market for a long time to void scams.
- The countries the broker is authorized to operate in so as to ascertain that your country is among them. It is always good to trade using a regulated broker.
- The products that the broker offers. The more the variety of cryptocurrencies the better.
- The types and features of the trading accounts offered by the trader.
- The fees charged by the broker especially in terms of commissions.
- The available deposit and withdrawal options to find out whether they favor you.
- The user interface of the trading platform. Here you should at the ease of access to the platform and the tools that are at your disposal trading.
Advantages of Cryptocurrency CFD Trading
- When trading cryptocurrencies using CFDs, a trader does not have to own any cryptocurrency physically. As a result, the risks of having your crypto wallets hacked into and the crypto coins getting stollen is reduced. Also, the hustle of going an extra mile to spend more on purchasing a hardware wallet so as to protect your crypto coins is not there.
- There are no real transactions of cryptocurrencies involved. Therefore, no transaction costs involved.
- A trader is able to trade cryptocurrency product using leverage.
Disadvantages of Cryptocurrency CFD Trading
- Cryptocurrencies are known to be very volatile since the prices of crypto coins are not regulated from any central location like a central bank. The prices of crypto coins are actually determined by the users of the networks themselves. This makes cryptocurrency markets very volatile and consequently very risky.
- Cryptocurrency CFD trading has very high spreads. Therefore, a trader will require larger margins to open and maintain positions. This means a trader may be required to have more funds in the account to be able to open a position or else choose higher leverage. The higher the leverage, the higher the risk in case the position turns to losses. A trader can open an EURUSD trade with a $1 account balance and be unable to open a cryptocurrency CFD position with the same broker.
In most cases, only traders with large deposits will be able to sustain cryptocurrency CFD trades over a long time due to the spreads.