Trading in cryptocurrencies is now an established part of the financial landscape. The pros and cons of a cryptocurency like Bitcoin when it comes to Forex trading have been discussed at great length. The advantages include:
• Low deposit amounts
• No transaction costs
• Valuations not effected by political or macroeconomic influences
• High levels of security and confidentiality
The degree to which cryptocurrency trading has become entrenched is underlined by the fact that traders now have the option of engaging in CFD trading on cryptocurrencies rather than buying and trading the cryptocurrencies themselves. CFD stands for Contract For Difference and is a form of trading in which the trader takes a position relating to the value of an asset offered by a broker and adopts a buy or sell position on the basis of whether they think the value of the asset is going to rise or fall. In practical terms the process of CFD trading works as follows:
• The trader chooses the asset being offered by the broker.
• The trader chooses whether they are going long or short. If they go long, they expect the value of the asset to rise, whereas if they go short they are betting on the value of the asset dropping. The rise or fall is based upon the price when the CFD is taken out.
• The trade stays open until the trader decides to close it or unless automatic closure is triggered by limits which can be set when the contract is taken out. These can include a Stop Loss or Take Profit point.
When the position closes the value of the asset will determine whether the broker has to pay the trader or vice versa. Traditionally, the broker will pay out if the value of an asset rises, but the fact that a trader can go short when setting up a CFD means it is possible to profit from a decline in the value of an asset. For the purposes of this particular article the assets in question are a cryptocurrency, and the trader will be taking out a CFD on the basis of how they think the value of that cryptocurrency is set to fluctuate against currencies such as the Euro and the Dollar.
The advantages of CFD Cryptocurrency trading
Ease of use – trading actual cryptocurrencies involves setting up a wallet and getting verified on a cryptocurrency exchange. If you haven’t got any experience of working or trading with cryptocurrencies this may be a little off-putting. The brokers who offer CFD trading, on the other hand, are likely to offer accounts which are easy to set up and offer user-friendly features like one-click trading.
Leverage – one of the most notable features of CFD trading is that you don’t have to actually own the commodity you’re trading in. This removes the need for a large initial capital outlay, something which is boosted by the high leverage opportunities offered by CFD trading. Leverage is a tool which allows traders to multiply the capital they are trading with. For example, if a trader has assets of £100, and a broker offers leverage of 5:1 then the trader will be able to open a position which is worth £500. With a larger opening position like this, the chances of making large profits on even small fluctuations in the value of a cryptocurrency are much higher. It need to be remembered, of course, that the possibility of large profits also comes with the chance that, if the cryptocurrency doesn’t behave as you expect, you’ll make larger losses than you otherwise would.
Stop Loss and Take Profit – the extreme volatility sometimes experienced by the cryptocurrency markets can lead to sudden shifts in value and with these shifts, huge profits and losses. No matter how carefully you watch the CFD positions you’ve opened it can be easy to miss a shift and, before you know it, the change in value of the cryptocurrency you’ve chosen, coupled with the leverage offered, can lead to a massive hit on your capital. Using tools like stop loss and take profit limits means that your position closes when a certain point is reached, protecting your profits and shielding you from loss.
Speed – the fact that you’re not actually buying or selling digital assets means that CFD trades can go through the broker’s platform in a fraction of a second. This allows traders to react instantly to any volatile shifts in the cryptocurrency markets, whereas cryptocurrency transactions using the blockchain can often be very much slower. Since the key selling point of any trade in cryptocurencies is the speed and size of the shifts they can make, this is a hugely persuasive reason for opting for CFD trades over trading the actual cryptocurrency.
Support – most CFD traders offer a comprehensive customer support service, with access via phone, email and online, whereas exchanges tend to leave traders to their own devices. If you have questions about deposits and withdrawals, for example, access to a customer support team could prove invaluable.
The main disadvantage of CFD trading in cryptocurrencies is that many brokers will charge fees for holding a position from one day to the next. This fee is based on a percentage of the current LIBOR rate, and the volatile nature of cryptocurrencies could result in this figure being prohibitively high. This means that a trader working on the basis of a longer term shift in value may well be advised to trade in the actual cryptocurrency itself, rather than a CFD, while the CFD option is ideal for traders who wish to take a position and cash out a profit over the course of a single day.
For the individual, choosing between CFD trading and trading in actual cryptocurrencies as assets will be a question of the trading style which they prefer. Do you feel you can handle the increased risk to reward ratio of leverage? Do you want to invest over a longer time period to take advantage of underlying trends? Would you like the support of a broker throughout the process? Answer these questions and you’ll have the answer to which option is ‘better’ for you.