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08/09/2020   Should You Trade Cryptocurrencies Through CFDs?

Cryptocurrency is the buzzword flying around the trading community for the last decade. Bitcoin was the first to show the real power of unregulated digital currency that allowed quite a number of people to acquire wealth through sheer patience. Some have bought it back in 2008 and kept their wallet to themselves, even forget about them for a bit, just to wake up one day open their favorite news channel, and see that they cost $30,000 per now.

Trading is extremely popular though. There are a number of assets that can be used like stocks and shares, currency pairs, cryptocurrencies, commodities, precious metals, and etc. Basically anything that has value can technically be traded for. Most of them have their own exchanges and platforms where the bulks of these trades are done. However, what not a lot of people are aware of is that cryptos can be traded through CFDs. This is a weird little manipulation but much like everything else in the trading sphere has its own cons and pros to be aware of. Both sides of the traders will usually question why would anyone do the opposite but it is a double-edged sword much like everything in life and heavily depends on what the trader feels comfortable doing.

Let’s outline some of the most commonly known advantages and disadvantages of trading crypto CFDs.
Advantages of Crypto CFD
Margin Trading
This is something unique to cryptocurrency CFD providers. These are the only parties that can actually afford to make these trades. However, it is becoming quite popular with larger exchanges like Binance for example. They are trying to implement this feature into their services at the time of writing this article.

Margin trading was first introduced by the CFD brokers back in 2017 when the popularity of cryptocurrencies have peaked. The main point is that margin trading enables the trader to have leverage on their cryptocurrency trades. A leverage is basically what the broker gives the user to help them trade for more than their capital investment. This is a popular strategy utilized in the foreign exchange market (Forex, FX) and is one of the decisive factors for a number of traders to choose their broker in FX. The core idea is that according to this IQ Option review different brokerage firms offer different sets of policies and leverage is one of them. This, up until margin trading, used to be something unique to currency pairs as it would allow the traders to make much bigger revenue than otherwise while looking out for the smallest market movements.

When trading Crypto through CFD though the leverage will be much lower. Instead of margins that we are used to in forex like 900:1, it is most probably going to be something around 10:1. However, some of the cryptos are generally valued much more than other fiat currency pairs and thus this margin still works for the benefit of the trader.

It is worth noting leverage is a double-edged sword by definition. While it allows the user to trade for a much higher value in case of bad trade decision it works much the same way as well. This was one of the main reasons why a big number of traders just switched to CFD brokers when the cryptocurrency prices were still going up. At that time when BTC was reaching $20,000, there were much fewer moments of doubt that it would grow even more thus it became a very “safe” way of making a hefty amount of money.
Liquidity
The CFDs have an upper hand due to the fact that they are basically fiat currencies and their liquidity is much better than crypto. When a trader wants to withdraw a cryptocurrency the process can be quite tedious. When trading altcoins the conversion has to happen into bitcoin and then either withdrawn through an offline bitcoin ATM machine or from an exchange which will probably ask for quite a big chunk of money from your revenue. However, when trading cryptos through CFDs the broker is basically doing all of the conversion while you, as a trader, are dealing with fiat currencies.

What this means is that in order to withdraw your money you just simply request it from a broker and they approve it. There is no need to convert your assets into USD or EUR or any other fiat money since your main trade is still done using the latter. The fiat currencies are also much safer to keep on your account due to the fact that volatility does not apply to them the same way it does to cryptos.
Security
There are a number of cases when crypto exchanges got hacked and had their whole money stolen from them. Tokyo’s gigantic cryptocurrency exchange Mt. Gox is one such example that ended up with the cumulative loss of $460 million in bitcoins. This was not the first time nor last time such a thing has happened. However, when it comes to CFDs the hacks are much less prevalent.
Disadvantages of Crypto CFD
Costs
One of the main disadvantages is the costs of trading on CFD. The idea is quite simple. Margin trading is not a long-term affair. Most of the time positions are opened and closed just in a couple of days period. The platform will also give you a deadline once the position is open and unless you pay a fee after the time passes the position will be closed by the platform. The fee is more than usually much higher than 1% of your current position and makes it a dodgy affair.

Due to this restriction, the crypto CFD traders are constantly in a rush to close their position. If one decides to keep it open for a prolonged period of time the fees will be higher than what you gain.
Lack of Choices
Most of the CFD brokerages provide much less choice between different cryptocurrencies. It still stays true that the broker does not want to allow easy traders into their platform thus they neglect this risk by providing less crypto options to trade with. This means that most of the CFDs now will have the most popular coins like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH), etc.

Most of these coins are the most popular ones but the gains are not being made on these anymore. They have lost their trading value back in 2017 and altcoins which cost less than $1 is where the revenue comes from these days. Due to this, the margin of profits will be lower.