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What is the difference between trading cryptocurrency and cryptocurrency CFDs?

Education / 5 Min Read
Axi Team / 24 Nov 2021

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’s better suited for you.

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, you can profit from an increasing price or a decreasing price, depending on whether you 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 open a long position, while those who feel otherwise open a short position.

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

Bitcoin CFDs example

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, you don’t have to open an account with a cryptocurrency exchange or set up a cryptocurrency wallet for storing cryptocurrencies. 

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

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 you to make substantial gains with small investments, losses are also magnified when margin is in play.

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

A reminder that cryptocurrency CFDs can only be traded by Professional Clients due to FCA regulations.

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. 

To trade cryptocurrencies, you must open an account with a cryptocurrency exchange and complete the KYC onboarding procedure. Then, after funding your account and making a purchase, the crypto exchange provides you with a hot wallet for storing your digital currencies and tokens. But this is risky as you may end up losing your tokens if the exchange is hacked. Hence, you should create a personal crypto wallet for storing your tokens. You can choose an online wallet, mobile wallet, hardware wallet, or paper wallet, depending on your 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.

Bitcoin trading chart highlighting the crash in May 2021

Trading crypto comes with certain challenges that don’t exist in the traditional financial markets. A major concern is the technical risks as misplacing your private keys, for example, can lead to the permanent loss of your investments. Crypto exchanges are also susceptible to hacks and 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

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

Cons

  • Leveraged trading is very risky as you can incur losses beyond your margin.
  • Fees you'll 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 you access to crypto services like DeFi and NFTs.
  • You can easily make payments (cross-border included) without third-party fees and interference.
  • Trading fees are often lower compared to traditional brokerages.
  • You 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 your wallet's private key or seed phrase results in the permanent loss of your investments.

Read more → What is an airdrop?

Which one's better for me?

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

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

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

In essence, your choice will depend on:

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

These factors will help you decide whether trading cryptocurrency or crypto CFDs is more suited to you. Whatever you choose, however, make sure you thoroughly research the assets you 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!

 

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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