Trading Cryptocurrency CFDs vs. Investing: What’s the Difference?
The advent of Cryptocurrency revolutionised the trading and investing industries. Their volatility is on the extreme end, with prices marching in and out with several zeroes before or behind them.
The great beginning
The first of several digital currencies to make a breakthrough was Bitcoin, released by Satoshi Nakamoto. Bitcoin’s initial years, from 2009 until 2011, barely even broke the $1 mark per coin. Yet, today, a single bitcoin can go over $50,000.
Similarly, Dogecoin started as no more than an internet joke. However, in just a year after its release to the public in 2013, it had a capitalization of over $60 million. It skyrocketed after Elon Musk’s tweets, and is even considered a candidate for being an optional currency. On the other hand, there is Ethereum whose cryptocurrency activity is but one aspect of its activity as a digital platform.
This begs the question – given the spike in price movement and the way some countries have begun to look at these digital assets, should traders trade cryptocurrency CFDs, or should they lean towards traditional investing? Each one comes with a set of pros and cons depending on the trader’s strategy.
Trading cryptocurrency CFDs
Contracts for Difference allow traders and sellers to form an agreement to pay the difference of the entry and closing prices of financial instruments. If the trader believes that the asset price will go up in value, they will go long on a position. Similarly, if they believe the asset will drop in value, they will go short. In this type of contract, the primary things to consider are what position to take and when to open and close it. Timing is crucial for the short-term nature of most trading strategies.
It’s always important to do your homework when finding a broker. The right fit will depend on your needs but you want to make sure that they’re regulated. . When you have done that, you can begin trading cryptocurrency derivatives with a demo or live account. In Eightcap’s case, you can enter the trading scene in a few short steps. As with everything else, trading cryptocurrencies has its own advantages and disadvantages.
Here are the disadvantages that every trader should be aware of:
- You do not own the underlying value of any cryptocurrency you trade. Consequently, you are unable to make purchases or transactions using it.
- Depending on your trading strategy, your trading window may differ and require you to be on the lookout during specific times of the day.
- Virtual currencies’ volatility means their value can change drastically in a matter of minutes. This increases the risk when trading them.
It goes without saying that trading Crypto CFDs also has its advantages:
- As a trader, you take advantage of cryptocurrencies’ frequent price fluctuations.
- Becoming a trader requires less funds overall given that digital currencies are a leveraged financial product that can be traded on margin.
- You can take both long and short positions.
- You’re not holding any cryptocurrencies because as a CFD trader, you do not own the assets themselves. This is a benefit if the value of the asset drops.
- Multiple order types – entry orders, profit-limit orders, stop losses and any risk management techniques that you may wish to employ.
While trading crypto derivatives means you take no ownership over a coin’s value, when you begin investing in it, this changes completely.
Shopping is another practical scenario for the use of digital currencies.
Usually, wallets are used to store physical funds in a pocket-sized version of a bank that is not completely secure. In the crypto world, digital wallets have similar purposes. Simply said, they are a program that comes with extra layers of protection. The biggest challenge here is the fact that investors must choose an exchange that they can trust. Potentially, one that allows buying crypto with fiat currencies such as USD, GBP, EUR, AUD, etc.
It can be either “hot” or “cold”. To explain the two, you hot-wire your wallet by connecting it to the Internet. However, when you leave it outside of the network, it gets “cold”. Hot wallets have the risk of being accessed by unauthorized parties online.
So, what are the pros and what are the cons? Let’s start with the cons:
- Cryptocurrencies have no anti-fraud protection, no refunds.
- Getting hacked is but one of your concerns.
- Investing essentially means buying and holding long-term.
- Buying crypto is generally more expensive as you don’t have the ability to leverage like with CFDs.
In order to close a position, you have to do it manually. Automation programs exist, but they are rather recent and potentially less well-developed than the ones on the trading side.
Additionally, investing in cryptocurrency has its pros:
- Owning crypto means that not all volatile ups and downs will prompt you to go long or short. Your main outlook, in most cases, would be holding and persevering.
- You have full control over the cryptocurrency you possess.
- You can use cryptocurrency for different kinds of money transfers.
Trading on margin is high risk.