The general idea of trading cryptocurrency for profit is familiar to most people remotely interested in financial markets. Buying cryptocurrency from an exchange when prices are low and selling when prices are up is one way to go about it. The alternative is trading cryptocurrency Contracts for Difference (CFDs) on a reputable brokerage platform.
There are many crypto exchanges available to purchase crypto. The largest of these are massive enterprises transacting billions of dollars worth of crypto every day in spot trading volumes.
Often, crypto exchanges offer currency pairs or crypto in exchange for fiat like the USD. A number even support derivative products alongside spot offerings. However, they are not necessarily specialized marketplaces in derivatives like CFDs.
Supporting CFDs requires a specialized professional trading platform. Brokerage firms have offered such services in Forex and commodities for a few decades. As cryptocurrencies like Bitcoin became a force within financial circles, brokerage platforms began looking into offering crypto CFDs.
As such, traders have the option of trading crypto CFDs through experienced brokers of which CryptoAltum is a cut above the rest.
But, really, how does trading CFDs compare to purchasing cryptocurrency via ordinary exchanges?
The key differences between CFDs and Exchange Trading.
In distinguishing between CFD trading and buying cryptocurrency via an exchange, let’s first define CFDs.
CFD is short for Contracts for Difference. A CFD is a contract through which traders can speculate on bidirectional price movements of a certain market without owning the underlying asset.
Traders either long (bet on prices rising) or short (bet against prices) and potentially profit in the case their calculations come true. A trader utilizes a brokerage company to settle the difference depending on the outcome of the contract.
These are some of the distinguishing aspects between CFD trading platforms and spot exchanges:
If you were to narrow down the essence of CFDs to one word; that word is leverage.
Leverage refers to a trading tool whereby a broker offers to magnify a trader’s deposit multiple times when making an order.
When trading with leverage, you only need a fraction of the trade value to gain full exposure to the underlying market. If you have a leverage of 10x, you stand to potentially make profits as though you made a deposit ten times the actual margin. For example, when trading with a margin of $100 and leverage of 10:1, it is as though you trade with $1,000.
Some crypto exchanges offer leverage on their derivatives. However, it is not as high as the leverage CryptoAltum, a professional crypto CFD broker offers.
Therefore, leverage vastly magnifies the exposure of traders in the market. Leverage enables you to trade with more cryptocurrency than you have. This factor is obviously not possible when purchasing crypto from a spot exchange.
Notably, just like profits are magnified when trading with CFDs, so are the risks. Take time to understand leverage and margin requirements well before trading CFDs.
2. Ownership of the Underlying Asset
From the definition, it is clear that owning crypto is a clear difference between spot trading and CFDs. Purchasing crypto from an exchange means that you pay for the coin using fiat or other crypto and take actual possession of the coin.
In case prices slide, you incur the losses that come along. If you are lucky to own crypto and prices happen to move up, then you can pocket profits should you choose to sell your holdings.
On the other hand, CFDs are simply derivative products that facilitate trading on prices. You don’t own the underlying asset but can potentially profit from it should prices move in your favor. For this reason, CFDs are also a popular tool for hedging against other investments.
Liquidity is also a feature of leading CFD brokers especially those with great market depth. See, with CFDs, ownership and liquidity of the actual cryptocurrency is not an issue. In fairness, a number of leading exchanges have excellent liquidity and can offer rapid processing of crypto.
3. Short versus Longer-Term Trading
CFD trading is more suitable for short term trading because of the low spreads when the order is executed within the same day. Also, roll over fees for keeping a position open within a given period of time can be charged. A key distinction with CryptoAltum is that there are no hidden charges and zero commission. Additionally, leverage and risk make it ideal for quicker trades. Purchasing from an exchange does not incur aspects like roll over fees. One needs to just buy crypto and hold — in the exchange or elsewhere, until they are ready to sell.
4. Strength and Speed of the Trading Platform
CFD platforms are built for power and speed in trading. Therefore, they are almost always better equipped to handle the needs of traders than exchanges. For instance, CryptoAltum utilizes the powerful MT5 trading platform to make their orders seamless. Traders also have access to specialized tools and indicators which are indispensable when creating a trading strategy. The precise technology and advanced capabilities of the MT5 trading platform make CFD traders have more maneuverability in trading.
CFD traders typically own, buy and dispose of their contracts faster than those who purchase crypto from exchanges. Therefore, it only makes sense that CFD brokers have fast and powerful trading platforms.
Which is better?
Crypto exchanges still have some way to go to catch up with CFD brokers in terms of pure trading efficiency. CryptoAltum offers superior levels of trading optimization in several aspects. Still, spot cryptocurrency exchanges have made tremendous progress in offering suitable platforms but they are still behind CFDs brokers who are flexible and can tap on the technological capabilities offered by the battle-tested MT5 platform.
Ultimately, it comes down to a choice of what kind of trading you want to indulge in. CFD trading is potentially vastly more profitable. However, it takes a great amount of skill and consistency to manage the risk that comes along. Purchasing and holding crypto from an exchange is relatively easy. Sometimes, all it takes is buying and holding crypto until prices are better.
CFD trading does not offer a trader this luxury. One has to be able to make decisions fast and possess a decent analytical capability. Mastering concepts like leverage and margin requirements are necessary for success in trading crypto CFDs. To this end, CryptoAltum has demo accounts for beginner traders to understand how this field operates before upgrading to real accounts.
Trading crypto CFDs can give a trader the ability to participate in the crypto market with a flexibility hodling does not provide. Buying from an exchange is a conservative approach in comparison.
Nonetheless, with proper analysis, CFD leverage can create earnings a hodler can only dream of.
Originally posted on https://cryptoaltum.com/en/exchange-versus-cfd-trading