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Comparing Crypto CFDs To Traditional Crypto Trading


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The cryptocurrency landscape has taken the global financial world by storm, and that is not an exaggeration. The introduction of cryptocurrencies and other digital assets into the financial market has completely revolutionized the regular business of the market. The buzz around cryptocurrency is not only attractive to newbie traders, but even seasoned investors and financial institutions are tapping into its potential. However, since cryptocurrencies are relatively different from other assets in the market, there are various methods for trading crypto. These methods can be confusing at first but eventually, one gets a grasp of them.

Popular techniques for trading crypto are:

  • Crypto Contract For Differences (CFDs), and
  • The traditional crypto trading

These two techniques are very different in terms of their mechanics, pros, and cons. Having a good understanding of what both techniques entail will be very beneficial to make better-informed and efficient decisions as a trader.

This post will guide its readers towards the peculiarities of both trading systems. This knowledge will be very useful for:

  • Understanding the core principles of traditional crypto trading
  • Highlight the mechanism behind Crypto CFDs
  • Understanding the differences, as well as the pros and cons of both trading systems
  • Making better-informed choices that align with your business or individual trading needs.

By the end of this post, readers will be better equipped with information and insights for navigating the crypto landscape seamlessly.

Crypto CFDs: A Deep Dive

Crypto CFDs exist as an alternative to the traditional crypto investments. Crypto Contracts For Differences (CFDs) provide a different approach to profiting from the price movements of crypto assets. They are very different from traditional investments where you need to outright purchase or own an item to gain from it. CFDs are contracts between an investor and a broker speculating the price movement of a specific cryptocurrency.

With CFDs, you do not outrightly own the crypto asset but you agree to exchange the difference in price between when you enter the contract and when you close it. This way, you are profiting off speculating the prices of assets which you do not own.

How does this work in the crypto market?

Let's take an example. An investor believes that the price of Bitcoin is about to rise. However, rather than buy Bitcoin on an exchange, the investor reaches out to a broker for CFDs. The investor now has to choose an amount to invest and specify whether the price is going up (going long/buy order) or going down (going short/sell order).

If, according to the investor's prediction, the price goes up, the investor makes a gain from the difference in the prices multiplied by the size of the contract. However, if the prediction is wrong, the investor makes a loss because to close the position,   there will be a need to repurchase the Bitcoin and return it to the broker. The loss is valued just as the gain is— the difference between the initial price and the repurchase price.

Traditional Crypto Trading: The Basics

Prior to the introduction of CFDs, traditional crypto trading was how investors speculated on price movement. In this system, investors have to outrightly buy or sell cryptocurrencies directly on specialized exchanges. Through that transaction, they become the actual owner of the crypto acquired. With this system, investors can place orders for immediate execution or limit orders to buy/sell at specific price units. Investors are also able to trade their cryptocurrencies against fiat currencies. Many investors have stuck to this system of trading because they get to hold and fully control their crypto for the long term. They also get to decide what to do with the crypto including staking and lending. However, trading crypto traditionally means that the investor is fully responsible for managing the investment. The investor will also be responsible for exchange fees and wallet security.

Comparative Analysis: Advantages

Having explored both sides of the coin— crypto CFDs trading and Traditional crypto trading, it is important to analyze the key advantages of these two systems.

  • Higher Leverage (CFDs): One of the major selling points for crypto CFDs is the availability of leverage. The leverage provided by brokers with CFDs allows investors to trade larger positions in the market with smaller capital. The way it works is quite simple. If a trader wants to trade $200 with a 5:1 leverage, that means they are trading with a $1000 position. This helps them to maximize potential gains. However, it comes with significant risks, it also has the potential to magnify losses.
  • No Exchanges Required (CFDs): Unlike traditional crypto trading, crypto CFDs do not require investors to have exchange accounts. To trade crypto via CFDs, investors are only required to contact a CFDs broker offering crypto instruments. This streamlines the entry process and improves the convenience and accessibility of crypto trading. However, this also means that the investors do not directly own the crypto assets and may pay higher fees compared to regulated exchanges.
  • Variety of Cryptocurrencies (Traditional Trading): With traditional crypto trading, investors are exposed to a wider range/variety of cryptocurrencies compared to CFD brokers. This variety can lead to investors exploring more unique cryptocurrencies beyond the popular Bitcoin or Ethereum.

Comparative Analysis: Disadvantages

Having explored the advantages, it is time to also learn the disadvantages of both systems.

  • Deadlines in Crypto CDFs: Unlike in traditional trading where investors have long-term ownership of their assets, CFDs contracts actually expire. The effect of this is that investors will need to close their position at a set time regardless of whether their prediction has materialized or not. Failure to close positions can result in automatic closures and even potential losses based on the current market price.
  • Commissions: Unfortunately, both systems come with their peculiar costs. For CFDs, brokers charge a spread (the difference between the buy and sell price. Some brokers also have extra commissions for opening and closing positions. On the other hand, traditional exchanges charge fees per transaction and then withdrawal fees when moving your assets to a personal wallet. However, the costs can vary across platforms or crypto pairs.
  • Regulatory Considerations: It is no news that the cryptocurrency world is quite new and still evolving on a global landscape. Regulations for CFDs trading vary significantly across jurisdictions. For traditional trading, however, while some countries already have crypto regulations set up, many still lack a clear framework for implementation. It is therefore important for investors to understand the regulatory landscape of where they reside and consider the risks involved.

Risk Assessment

Understanding the potential level of risk exposure is very important for all investors. The truth is that both traditional crypto trading and crypto CFD trading come with their inherent risks. Let's explore the potential risks of both systems and how to mitigate these risks.

Crypto CFDs Leverage

As earlier mentioned, leverage can be a very important tool for the success of many traders. However, it remains a double-edged sword— on one side is the high potential for maximizing gains, and on the other is the possibility of making more losses. The losses can manifest in these ways:

Margin Calls: If your predictions are wrong and the market goes against you, your broker would typically demand additional funds to maintain your position. Failure to meet this call can lead to your position being liquidated. Consequently, you may experience significant losses that exceed your initial investment.

Emotional Trading: Leverage can sometimes tempt traders to make impulsive and ineffective decisions due to their greed or fear. This can further increase their exposure to losses.

To manage these risks, investors should:

  • Always start small
  • Always consider the risk-reward ratio for a trade before entering a position
  • Use stop-loss orders to exit a position when losses reach a set level.

Traditional Crypto Trading

Some of the risks associated with traditional crypto trading are:

Volatility: The crypto market is known for its rapid price fluctuations and volatility. This can lead to losses for investors who buy crypto to hold for the long term.

Exchange Security: Various unscrupulous entities are hiding under the front of exchanges. Investors may be at risk of dealing with fraudulent exchanges or exchanges with weak security against hacks and scams.

Wallet Security: Investors face the risk of losing their access to their assets when they lose the private key to their wallets.

Here are some of the ways to mitigate these risks:

Diversification: Investors should spread their portfolio across different cryptocurrencies and asset classes to reduce their risk exposure.

Assets Security: It is important to store assets in secure wallets and enable 2FA for added security.Dollar-Cost Averaging (DCA): This technique involves investing a fixed amount of money at regular intervals to average out the cost of investment over time and reduce the impact of volatility.

Decision Making Factors

Earlier, we discussed crypto CFDs and traditional crypto trading, including the pros and cons associated with them. However, before investors choose the method that aligns with their individual goals and risk tolerance, they also consider some key factors. They are:

Investment goals: Investors should consider their trading aim whether it’s for short-term speculation or long-term investment. Short-term speculators are better off with crypto CFDs and long-term investors are advised to outrightly buy and hold their crypto assets.

Risk tolerance: High-risk-tolerant investors are better suited to taking advantage of leverage options provided by CFDs. Risk-averse investors may however choose to go with traditional trading if they prioritize capital preservation and want to minimize potential losses.

Technical Knowledge and Experience: Beginners are advised to lean towards traditional trading since it requires less initial technical knowledge, they just have to buy and hold. However, experienced traders with advanced knowledge in technical analysis, risk management, and strategies will lean towards CFDs for potential higher returns.

Fees and Costs: Investors should analyze trading fees, commissions, and withdrawal fees associated with both trading systems before making a decision.

Decision Making Factors

Q1: Which method is most suitable for beginners in crypto trading?

Traditional trading is more beginner-friendly since it focuses on direct ownership and doesn’t involve leverage. It’s less complicated and technical for beginners.

Q2: How does leverage differ in Crypto CFDs and traditional trading?

Traditional trading does not involve leverage at all, it is direct ownership. CFDs on the other hand offer leverages that allow you to control larger positions with a smaller investment.

Q3: Are there regulatory considerations for both trading methods?

Yes. There are regulations around both crypto CFDs and traditional crypto trading. However, these regulations vary globally. It is important to research your region’s regulations on both techniques.

Our solutions allow trading with both methods described in the article. Contact us to learn more

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