Cryptocurrency trading comes in all shapes and sizes. There are hundreds of different coins and different industries to choose from. This makes the market a lot more vibrant. But there are traders that are not satisfied with the already existing options and demand more. Usually, these traders are reinforced by traders who migrated over from traditional financial markets such as stocks or Forex. Due to relatively different market infrastructure, many got off-put from trading cryptocurrencies and started searching for different options. Therefore this is exactly where CFD (contract for difference) and even Forex brokers come into play.
The Two Choices
The difference between Crypto CFD trading and regular coin trading is not that big. In fact, crypto exchanges have been trying to mimic the CFD brokers by trying or implying about introducing margin trading, which is arguably the most important feature of CFD trading. For example, when cryptocurrencies started gaining some momentum, brokers started scrambling for a solution. According to Forexnewsnow.com, a financial media outlet covering both Forex and crypto industries, it all started to come together when IQ Option reviews and various other brokerages started appearing on cryptocurrency websites. At first, everybody was dumbfounded as to why a Forex broker was featured here. It took very little time to find out that Crypto CFDs had become a thing.
Soon enough, more and more traders starting using these options to diversify their portfolio and in some cases even overtake regular crypto traders. Let's look at the differences between these trading strategies.
Crypto CFDs - The Good and the Bad
Crypto CFDs quickly gained momentum when people started migrating from Forex and stock trading platforms. The primary reason was the familiar trading style and software which lowered the learning curve significantly, but there was 1 feature that won over some original crypto traders as well.
Margin Trading = Leverage
Margin trading was something unique to CFD brokers compared to Crypto exchanges. As a matter of fact, the exchanges have just now started offering leverage, and a small one at that. While CFDs have always been traded in such a manner, leverage supports traders to increase their investments and actually trade more than they've invested. For example, if a person invests $100 in trading Bitcoin on a crypto exchange, then his or her portfolio is limited to only that $100. While crypto CFD traders could invest $100 and use leverage as high as 1:30. Meaning that instead of $100, they'd be trading with $3,000. This helped gain massive gains in the months of September, October, November, and December of 2017. However, the CFD option is not too profitable during a bear market.
In fact, that was the sole reason that many traders started getting sour towards crypto CFDs as soon as the "Crypto Winter" started.
Deadlines were the biggest problem for CFD traders. Every trader would be given a deadline in which they had to close the position. If they failed to do so, then the platform would do it for them. These deadlines usually ranged between 24-48 hours, so basically forcing traders to day-trade. Naturally, during the crypto winter, daily spikes were becoming harder to notice. Therefore the profitability of leveraged crypto trading decreased, as leverage can cause as much damage as it can provide value.
Traders could not HODL their holdings and just wait out a Bear season, they had to either close their positions at a loss or extend their deadlines which cost hundreds in fees.
Crypto Trading - Why It's Superior
Soon after the Crypto Winter started, many CFD traders migrated back over to crypto exchanges, in order to transfer their funds into an asset they could hold on to pretty much forever. Although it didn't work out as well as many thought, it was still the best option at that point. Naturally, this is the first strength of cryptocurrencies, being able to hold on to them and waiting out a declining market, and it usually works.
Large investments in cryptocurrencies sometimes provide investors with a voice on how the project should develop further. For example, if a coin is emitted and one single person buys or mines 20% of it, then he or she will have a seat at the shareholders' boards. This provides control over one's assets, being able to influence the market and potentially maxing out the profits. Although it is usually considered as a very unprofessional thing to manipulate a market, it is still nice to have control over your coins.
A More Diverse Market
Crypto exchanges are usually able to feature dozens of different cryptocurrencies. Therefore traders are able to focus on a couple of coins at one same time. They are able to diversify their portfolio with various coins, both Popular and unpopular. For CFD traders, however, that is a luxury. Most brokerages would provide CFDs on Bitcoin, Ethereum, Litecoin and sometimes XRP. The choice was quite small and narrowed the profit margin even further.
The Comparison of the Two Strategies
Overall, it is very hard to say which trading strategy is superior as both of them are able to field such strong advantages. But, in the end, it all comes down to the trader's character and his or her plans. If a trader has decided that they want a long-term trading strategy, then going for CFDs may not be the best idea. The hundreds of dollars in fees to prolong the deadlines will hamper their profit margin. It's best for them to buy coins from an exchange and store them in a wallet for a while. A day trader, however, would find it a lot more profitable to trade with Crypto CFDs. Since they're already focused on closing their positions within 24 hours, no additional fees will be applied. Furthermore, they'd be able to use the increased leverage and sometimes even out-perform HODLers.
Overall, it is a very balanced division. Both options have their own appliances, and most importantly, their own target markets. But seeing how large exchanges such as Binance consider introducing crypto margin trading, we may see Crypto CFDs go extinct in the near future.