What is the difference between trading cryptocurrency and cryptocurrency CFDs?

In the past decade, the meteoric rise of the global crypto market has left a lasting impact on the financial markets. With Bitcoin outperforming all traditional asset classes in the last ten, five, and three years.

Unsurprisingly, many investors are diversifying their portfolios by investing in blockchain technology and the top performing cryptocurrencies.

The two main ways traders and investors can gain exposure to cryptocurrencies are by buying cryptocurrency directly through an exchange or trading cryptocurrency CFDs.

Read on to learn about the difference between trading cryptocurrencies and cryptocurrency CFDs and find out which one more suitable for investors.

Firstly, what are CFDs?

Let's start with understanding what CFDs are.

CFDs (Contracts for Difference) are financial derivatives that allow traders and investors to trade a wide range of assets and securities without actually holding the underlying asset. Instead, traders buy and sell CFDs to gain exposure to the price movements of an asset without actually owning it. 

With CFDs, investors can profit from an increasing price or a decreasing price, depending on whether traders are going long or short. 

When trading CFDs, traders enter agreements with brokers who offer contracts for the underlying asset of their choice. Traders who think the price of an asset will go up to open a long position, while those who feel otherwise sell an opening position.

The profits and losses are calculated by observing the difference between when a position is opened and closed. If traders predictions are successful, the broker pays the difference between the price when traders opened a position versus when closed it multiplied by the CFD units that the trader purchased. If a loss is made, traders pay the broker the difference multiplied by the CFD units.

CFD trading on cryptocurrencies

Cryptocurrency CFDs allow traders to speculate on the price movements of cryptocurrencies without owning the underlying tokens. 

Cryptocurrency CFDs are popular among traders who don’t want to deal with the technical process of securely buying and storing cryptocurrencies but want to capitalise on their price movements.

When trading crypto CFDs, traders don’t have to open an account with a cryptocurrency exchange or set up a cryptocurrency wallet for storing cryptocurrencies. 

Instead, traders can trade cryptocurrency CFDs with online brokerages like Axi. Furthermore, crypto CFDs are fully regulated financial instruments so traders don’t have to worry about crypto regulations when buying and selling crypto CFDs.

Trading cryptocurrency CFDs incorporates all the features of a typical CFD - traders can open long or short positions with small amounts that can be leveraged, and profit or lose from the price difference between opening and closing positions. And since cryptocurrency CFDs don’t have expiry dates like futures contracts, traders can open positions without having to worry about fees for rolling over contracts periodically.

The use of leverage also gives traders increased exposure to the crypto markets while depositing just a small amount of capital. While leverage allows traders to make substantial gains with small investments, losses are also magnified when the margin is in play.

As cryptocurrency CFDs function like traditional CFDs, the market in which traders operate is different, and as such, should be given proper consideration. The crypto markets are highly volatile and often defy normal trading logic. Before investing, traders should research extensively in the cryptocurrency that they are interested in and develop a risk management strategy that aligns with the investment goals.

Learn how to trade cryptocurrency CFDs and gain access to the following CFD contracts:

• Bitcoin (BTCUSD)
• Bitcoin Cash (BCHUSD)
• Litecoin (LTCUSD)
• Ethereum (ETHUSD)
• Ripple (XRPUSD)
• Cardano (ADAUSD)
• Dogecoin (DOGUSD)
• Polkadot (DOTUSD)
• EOS (EOSUSD)
• Chainlink (LNKUSD)
• Stellar Lumen (XLMUSD)

Trading cryptocurrencies on a crypto exchange

Unlike cryptocurrency CFDs, the process of trading cryptocurrencies directly on crypto exchanges requires technical knowledge of how cryptocurrency functions. Since cryptocurrencies are virtual currencies that run on public blockchains, they are typically decentralised and not controlled by any central authority. As a result, it’s up to the traders to securely buy and store cryptocurrency, which can be tricky for first-time buyers. When buying and selling crypto through a crypto exchange, a user is usually trading on the crypto spot market.

To trade cryptocurrencies, the first step is to open an account with a cryptocurrency exchange and complete the KYC onboarding procedure. Then, after funding the account and making a purchase, the crypto exchange provides a hot wallet for storing digital currencies and tokens. But this is risky is traders may end up losing tokens if the exchange has been hacked. Hence, users should create a personal crypto wallet for storing tokens. Traders can choose an online wallet, mobile wallet, hardware wallet, or paper wallet, depending on the intentions.

Factors that influence the price movements of cryptocurrencies are an important metric to consider when trading crypto. The market for a cryptocurrency is influenced by its tokenomics, coin supply, liquidity, the utility it brings, market perception, news, and macro events. 

Cryptocurrencies regularly experience steep price changes due to positive and negative news. The price of Bitcoin, for example, crashed in May 2021 when mainstream media re-highlighted the issue of the Bitcoin network’s high energy usage.

Trading crypto comes with certain challenges that don’t exist in the traditional financial markets. A major concern is the technical risks as misplacing the private keys, for example, can lead to the permanent loss of the investments. Crypto exchanges are also susceptible to hacks. Crypto regulations can also change quickly, which means exchanges may temporarily freeze funds without notice or are forced to shut down. These challenges are among the top reasons why many traders prefer trading cryptocurrency CFDs over owning cryptocurrencies directly.

What are the pros and cons of cryptocurrency CFDs?

Cryptocurrency CFDs provide an excellent way of getting exposure to cryptocurrencies. However, as with all crypto derivatives, there are benefits and drawbacks.

Pros

• Users can speculate on the price movements of cryptocurrencies without owning the underlying coin. 
• Users don't have to deal with the risk of managing a crypto wallet. 
• Users have access to leverage trading. 
• There's no fear of hacks as the market is regulated with protection against loss of funds. 
• Users don't have to be tech-savvy to trade cryptocurrency CFDs. 
• Users can profit both in a bull and bear market movement.

Cons

• Leveraged trading is very risky as might incur losses beyond the margin. 
• Fees users have to pay can be high compared to trading through crypto exchanges - spread, funding fees, and commissions.

What are the pros and cons of crypto trading?

Pros

• Trading cryptocurrencies via exchanges gives users access to crypto services like DeFi and NFTs.
• Users can easily make payments (cross-border included) without third-party fees and interference. 
• Trading fees are often lower compared to traditional brokerages. 
• Users can access a wider range of cryptocurrencies.

Cons

• Some crypto exchanges are not regulated.
• The trading process can be complicated for investors who aren't tech-savvy.
• Exchanges may be subject to hacks.
• Losing the wallet private key or seed phrase results in the permanent loss.

Read more → What is an airdrop?

Which one's better for me?

The decision of whether traders want to trade crypto CFDs or invest in crypto directly is, of course, entirely up to traders. Depending on the risk tolerance level, crypto know-how, and financial goals, traders can decide which one is better for you.  

Cryptocurrency CFDs can be very profitable if traders want to make short-term trading profits without wanting to deal with the hassle of securely storing cryptocurrencies in different crypto wallets.  

On the other hand, trading cryptocurrencies through exchanges probably makes more sense if traders want to invest in crypto with a long-term view. Taking this route requires traders to be tech-savvy enough to carefully manage their wallets and navigate crypto exchanges.

In essence, their choice will depend on:

• How much crypto know-how to possess (or are willing to develop). 
• Whether traders are investing for the short or long-term. 
• How much investment capital have (with CFDs traders can trade with little capital). 
• The type of trading platforms traders prefer to use (a traditional brokerage or a crypto exchange). 
• Whether traders want to trade with leverage or not. 

These factors will help traders decide whether trading cryptocurrency or crypto CFDs is more suitable. Whatever the trader chooses, however, make sure to thoroughly research the assets will plan to trade and that you never invest more than you can afford to lose.

Open a live trading account with Axi and start trading Bitcoin and Ethereum CFDs today!