Cryptocurrencies are quite versatile assets. Their logistics are quite fast and simple. In fact, we all know why cryptos are so popular for transactions, they take way less time than traditional currencies and of course, they have anonymity. However, cryptocurrencies have been moving away from their initial “plot” and are becoming something like a tradeable good, more than a payment method. Therefore there are always demands on more platforms to trade them on. Currently, there are very few that offer all cryptocurrencies, while some specialize in only a few of them.
Despite the initial rift between traditional asset traders and crypto traders, a consensus needed to be made. Meaning that traditional asset traders were becoming more and more interested in the cryptocurrency sphere, but were not willing to start learning all the tools and software connected to them. Therefore they needed to find a compromise. Thankfully, some financial companies, namely CFD brokers were able to supply them with this option and started listing BTC CFDs and ETH CFDs. However, after this listing, a major question was asked, which is better to trade? Actual cryptocurrencies or crypto CFDs? Let’s try and answer that question with the simple advantages and disadvantages of crypto CFDs.
Crypto CFD advantages
CFD is an abbreviation for Contract for Difference. Meaning that the person is trading the price points and not the assets themselves. That is one of the largest differences between the two assets, and the difference I will be focusing on. But let’s start with the benefits of trading crypto CFDs.
CFDs are usually traded with leverage, while cryptocurrencies very rarely have this option. Leverage is a very simple tool. For example, let’s imagine that I just invested $100 in a Bitcoin CFD, and I am using a 1:10 leverage. This means that Instead of that $100, I am trading with $1,000. Naturally, at the end of the trade, I have to return all of the “borrowed” money to the broker with some additional funds as well, but overall my profits will increase. Leverage can be quite dangerous as well, unfortunately. For example, if you make a wrong decision and zero-out the account even with leverage, you might find yourself in debt with the broker. That’s why its best to always back out of the trade, once half of your initial investment is lost. In this case, I would back out once my account reached $950.
Most CFD brokers are licensed and regulated by appropriate Financial institutions. This means that every trader has a guarantee that, in case of a mistake from the broker’s part, their funds will be returned. Crypto Exchanges don’t fall under those regulations quite yet, but will soon do.
Unfortunately, however, this is where the advantages for CFD trading end and the disadvantages begin.
Crypto CFD Disadvantages
Thanks to mass popularization of cryptocurrencies on the African Continent, most financial companies started to introduce Crypto CFDs. Most notable ones were the Forex brokers from South Africa, that poured in the options. But as soon as the traders found about the limitations that Crypto CFDs had, they immediately backed out. The limitations were the following…
Impossible to trade long-term
CFDs have one massive disadvantage to them. They have deadlines, meaning that after a few days they will close themselves, even if the position is unfavorable. In most cases, you can extend the deadline, but that will cost you some fees. To be quite frank, holding a crypto trade for more than 24 hours can prove to be quite expensive as CFD brokers charge overnight-fees that could easily start racking up the more you wait. Therefore CFDs are pretty much exclusive for day traders and not HODLers.
Restrictions on storage
Crypto CFDs don’t require storage, which could be dubbed as an advantage, but since when is a crypto wallet a liability? The lack of storage can actually prove to be a disadvantage since their allocation will prove impossible. Cryptocurrencies are becoming great ways of payment on the internet. You can pay with them for a bunch of services and products as well. While having them stored as tradeable goods, you can also use them as a means of payment, while CFDs are just tradeable goods, which aren’t even stored anywhere.
Furthermore, if the CFD broker changes some policies on their platform, you may be forced to withdraw at an unprofitable price point and relocate on a different brokerage. If something like this happens with a Crypto exchange it is much easier to allocate your coins.
Pretty much every crypto trading guide will tell you to diversify your portfolio at all costs. This helps to prevent any type of zero-out of your account and helps to always have a back-up. Unfortunately for Crypto CFDs, there are only a few of them available. In most cases, you will find just Bitcoin CFDs, with a rare occurrence of ETH CFDs.
I hope you can see the differences between these two assets now. Although they are quite similar and react to the same market, they are extremely different. It’s best to assess both options and decide which one is best for your personal trading style. Although Crypto CFDs have so many disadvantages, they can still be useful for some traders with unique strategies.