Cryptocurrencies and Contracts for Difference (CFDs) are two instruments with which traders and investors will be familiar. At first glance, you might think they have very little in common. We all know what cryptocurrencies are, and from the investment angle, both their strengths and risk factors lie in their inherent volatility. A CFD, on the other hand, is a financial derivative conducted as an agreement (or contract) between a trader and a broker whereby the trader will gain or lose the increase or decrease in a specific asset’s value over a determined time period.
You might think the only real commonality is that both are somewhat intangible in nature compared with, say, precious metal or shares. However, what you might not realise is that CFDs themselves present an ideal way of trading crypto. In fact, CFDs are becoming increasingly popular among casual traders. For example, one of the reasons so many people have shifted their allegiance to forex.com as a trading tool is down to its numerous CFD broker awards.
So could CFDs be the safest way for beginners to get into crypto trading or are they better off sticking to a traditional exchange? Let’s get one thing straight from the outset, there is no “right answer” to the above question. However, there are definite pros and cons to using a crypto CFD. Here, we run through the main influencing factors:
CFDs have better liquidity
At their current stage of evolution, cryptocurrencies in general and altcoins in particular, are not very liquid. Suppose you want to “cash out” some Ether or Ripple, for example. First you’ll need to convert it to BTC and then withdraw it through either an exchange or a Bitcoin ATM if you can find one, both of which will sap money. You are also limited in how much you can withdraw at a time, which is why we have seen so many people get their fingers burned in bear markets. A CFD is far less complex or costly to shift at short notice.
With CFDs you are on the sidelines
We mentioned the tangibility factor earlier. You could argue that when you own a Bitcoin you at least have an asset, even if it is a digital one. With CFDs, you are trading on ideas and theories. In other words, even if you buy yourself $1 billion of CFDs, you will still be standing on the sidelines as a spectator. You are not directly influencing the market dynamic in the way that you do when actually buying and selling cryptocurrency.
CFDs bring more options
Specifically, we are talking about margin trading here. The CFD traders were the first to introduce it in the world of crypto when they first entered the market in 2017, and it means you can get extra value out of every trade. The comment above about buying $1 billion worth of CFDs might sound exaggerated, but keep in mind that you only need to actually lay down five or 10 percent of the actual value. The exchanges are starting to catch on, but right now, margin trading is still predominantly the purview of the CFD brokers.
On a day-to-day basis, the cost of CFDs can mount up. They typically have a deadline, which you can think of as a “maturity date.” If you want or need to extend it, for example if the value has dropped significantly and you’ll be facing a loss, the fees for doing so can be significant, perhaps one percent of the overall trade. If you are trading short term, that might not be a problem, but if you are taking a longer view, then the crypto exchange remains the tool of choice, at least for now.