StsRoyal Explains: Crypto CFD Trading vs Exchange Trading – What’s the Difference?
These days, anyone who knows even a bit about finance has heard of cryptocurrencies. This industry simply exploded in popularity last year due to the surge of Bitcoin and the cryptocurrency market begun to attract the attention of more and more traders worldwide. Due to its unlimited profit potential and extreme volatility, people started to go absolutely crazy where cryptocurrencies were concerned. This led to the introduction of a number of products, tools and services in the market that enabled people to earn more in the crypto market. The sudden surge as well as increase in popularity also boosted the number of trading platforms offering their customers access to a wide array of cryptocurrencies.
There are several ways of trading cryptocurrencies nowadays. Some people prefer to use an exchange for this purpose, but there is also the option of CFD trading when it comes to this new virtual, digital currency. However, before any trader can make up their mind about whether to trade through an exchange or look for a broker for trading CFDs, it is essential for them to understand exactly what they entail. Let’s take a look at the ins and outs of both options:
Cryptocurrency CFD Trading
Cryptocurrency is a digital currency that has been designed to serve as a medium of exchange. Cryptography is used by these for tracking transfers and purchases and they rely on the internet for guaranteeing their value and confirming transactions. Obviously, Bitcoin is the best known cryptocurrency all over the world, but there are a variety of other popular options such as Ether (ETH), Bitcoin Cash (BCH), Ripple (XRP) and Litecoin (LTC). A CFD or Contract for Difference is a financial derivative that is conducted as agreements (contracts) between a brokerage company and a trader.
Traditionally, CFDs were based on a commodity, share, index or currency pair. Opening a CFD trade means that a trader is speculating on whether the value of the underlying asset will decrease or increase. Put simply, when you are investing in a CFD with a broker, it means that you don’t really own the asset as you are simply predicting the rise or fall in its value. For every single point that the price in the direction you have predicted, you will be able to earn multiples of the number of units you have purchased or sold. But, if the price goes in the opposite direction, you will end up incurring a loss.
With a cryptocurrency CFD, you are basically predicting the future changes in value of a specific pair of cryptocurrencies. A number of CFDs enable you to open contracts on the performance of a cryptocurrency relative to a fiat currency. In most cases, it is the US Dollars (USD), but there are some brokers that also provide crypto/crypto CFDs such as BTC/ETH. When you buy a cryptocurrency CFD, you can speculate the direction in which the value of a cryptocurrency pair will move. Some of the pairs include:
If you believe that the value of a cryptocurrency will decrease, you will ‘go short’ and if you expect it to increase, you will ‘go long’. This provides you with the potential of making a profit in both falling and rising markets. Leverage is one of the key concepts that you need to be aware of before you decide to trade cryptocurrency CFDs as it is both a key advantage as well as a disadvantage of this particular kind of derivative. In order to begin a CFD trade, traders are required to deposit a small percentage of the entire value of the trade. This is referred to as the margin requirement and can be 5 percent or even 20 percent of the whole transaction.
For instance, if you are opening a trade on the StsRoyal crypto trading platform with $10,000 you may only have to pay a deposit of $500. However, the key thing to know is that you can still get 100% of the profit if the price movements in the direction you have predicted. Suffice it to say, when trading on margin, traders are able to magnify their returns, which gives them the potential of earning a much higher return from a relatively small amount of investment. On the other hand, this also means that the losses are magnified if the trade doesn’t move in your said direction because they are calculated based on the whole value of the position.
This means that traders can end up losing a lot more than they have deposited if the price doesn’t move in their predicted direction. It is a crucial risk that traders need to be aware of when they decide to trade crypto CFDs. Apart from that, it is also possible to trade CFD instruments with the use of take profit and stop loss tools. These features can be incredibly useful when you consider how immensely volatile the cryptocurrency market can be. Creating a stop loss order means that you determine the price level at which to close your position in order to prevent any further losses.
In contrast, take profit means that you can lock in your profit safely before there is a decline in the price of the cryptocurrency. Both take profit and stop loss are extremely important features that are vital when you are trading cryptocurrencies. It is a good idea to set them at a price level that won’t be triggered all the time because this might destroy your capital as cryptocurrencies are very volatile in nature. If you are considering crypto CFD trading, you should know that it is regarded as a good option for day trading cryptocurrencies because this involves lower spreads.
However, a swap fee is usually charged by the brokers when traders choose to stay in a position overnight. This is a major reasons why CFD brokers are not suitable when you are interested in long-term holding and investing. Therefore, CFDs are often regarded as a complicated way of trading cryptocurrencies. They are relatively a new addition in the cryptocurrency market, but they have been around in other financial markets for a long time such as forex, shares and commodities. They key difference that sets them apart from buying and trading cryptocurrencies through other methods is that when trading CFDs, traders don’t really own any cryptocurrency.
Traders also need to understand some technical jargon when they are considering indulging in crypto CFD trading such as leverage, margin, take profit and stop loss. Similarly, they should know that ask price is the price at which the CFD is bought whereas bid price is the price at which it can be sold. Other than that, there are a number of benefits that traders can enjoy when they decide to trade crypto CFDs with StsRoyal and they are:
- Cryptocurrency CFD trading enables trading on margin, which can be useful for magnifying gains.
- It allows traders to be able to trade cryptocurrencies without actually having to own any of them.
- When trading crypto CFDs, there is no need for traders to have a cryptocurrency storage wallet or have to deal with any cryptocurrency exchanges.
- Crypto CFD trading can also be quite useful in rising and falling markets.
- It is easy for traders to get started with CFD trading by making use of fiat currency.
- You can trade crypto CFDs on regulated platforms, which provides greater security and assurance.
- You can enjoy much better customer support on CFD trading platforms as opposed to traditional cryptocurrency exchanges.
- When trading crypto CFDs, you are able to get access to an increasing range of popular cryptocurrencies.
- The risks associated with this kind of trading can be reduced with the use of take profit and stop loss trading tools.
Apart from these benefits, crypto CFD trading also comes with some downsides that traders should be aware of and they are:
- As mentioned before, trading on margin is offered with CFD trading, which can actually magnify losses.
- With crypto CFD trading, there is a possibility that traders end up losing a much greater amount than they have actually deposited.
- The problem with crypto CFDs is that they are not good for traders who are looking for long term trading and holding.
- The nature of cryptocurrencies is highly speculative and volatile and this also creates a risk in itself.
- CFDs are also speculative by nature, which means the trade can go either way and there is no way to ensure success.
Now that you know the ins and outs of crypto CFD trading, it is a good idea to take a look at the other option that you can use i.e. exchange trading.
Cryptocurrency Exchange Trading
Most of the traders in the market that buy and sell cryptocurrencies use cryptocurrency exchanges for doing so. Therefore, this kind of trading is often referred to as exchange trading. It involves the use of digital or fiat currency for buying the crypto coins you wish to invest in. Traders who indulge in exchange trading will hold onto these purchases for a period of time hoping that their chosen cryptocurrency will experience a rise in price. If and when there is an increase, the traders will then sell the coins for a profit at a later date. In case there is a loss, the traders can choose to hold onto them to see if the cryptocurrency rises again or they can sell it immediately to keep their losses at a minimum as the price might fall again.
Exchange trading is regarded as a simple and straightforward way of potentially benefitting from the rise in the prices of cryptocurrencies and trades can be placed on both centralized and decentralized platforms. Exchange trading is different from cryptocurrencies because in this situation, you actually own the cryptocurrencies you have invested in and they are yours to keep if you want. You can decide to sell whenever you deem you have made enough profit or you want to control your losses. Since there are no swaps where cryptocurrency exchanges are concerned, traders are free to hold their cryptocurrency for as long as they prefer.
Traders can then sell the cryptocurrency for fiat currency or they can also exchange them for any other cryptocurrency they wish to purchase. Here, the spreads are bigger, but they are negated by a considerable rise in value. There are a ton of cryptocurrency exchanges that you can find these days and can sign up on one that offers you the cryptocurrency of your choice. As the number of these cryptocurrencies has also increased, traders are interested in different ones, but they might not be available on all platforms. Exchanges also charge trading fees and commission on transactions and this is something that traders need to be aware of.
You can compare different exchanges to figure out which one offers you the best deal in terms of cost. Obviously, you don’t want to sign up on an exchange that has too high fees because that will simply eat into your profits. Furthermore, you also need to deposit funds into your account on the exchange. This means that you have to go through a verification process in which you have to provide some personal details and documents. The verification period can vary, depending on the exchange as well as the type of account you have signed up for.
Exchange trading also gives you the option of practicing trading through a demo account with virtual money in order to get some experience. This can be immensely helpful because it allows new traders to get their feet wet without putting their actual hard-earned money at risk. One thing that you should bear in mind is that cryptocurrency exchanges don’t support all fiat currencies so this is another thing you need to look for before deciding what exchange to use. As far as the process of trading is concerned, it is not exactly rocket science.
Once you have signed up for an account on a cryptocurrency exchange and made your deposits, you just need to select your desired cryptocurrency and open the trade. After it is done, you need to watch the price chart to decide which way to move your trade. In exchange trading, traders have the option of placing buy and sell orders and also stop limit orders. There are some tech analysis tools also available, but they are not as diverse as in the case of CFD brokers, which might come off as a downside to some.
An important thing you should remember is that you need to read customer reviews before choosing an exchange. These reviews are the best way to gain an insight into how an exchange works and whether it can offer you the best possible deal or not. Customer reviews will also tell you what kind of customer support you can expect when you sign up on the exchange. Good quality customer support is vital in order to ensure that you are able to trade smoothly. Therefore, it is not something that should be taken lightly.
Plus, going over reviews also enables you to identify any scams and frauds. The crypto market has its share of scams and frauds and you don’t want to be another victim. Reading the reviews can help in this regard. In addition, it also allows you to find out the security features of the exchange, which is extremely crucial. After all, you are trusting the cryptocurrency exchange with your sensitive and confidential information and also your money. Thus, you want to make sure you do it with someone you can rely upon.
As long as you choose the right exchange, trading cryptocurrencies becomes immensely easy. You can buy and sell whenever you believe you have gotten the most out of the trade or just want your money back. It is up to you to decide if you want to get fiat currencies in exchange or you want a different cryptocurrency. You do have to pay some commission and fee, but the best exchanges can offer you some competitive deals that make trading worthwhile and gives you the opportunity of making the most out of your cryptocurrency investment.
Now, the question is which option to go for? When you want to enter the cryptocurrency market, should you think about crypto CFD trading or is exchange trading a better option?
Why Exchange Trading is Better
As mentioned before, buying the cryptocurrency of your choice, holding it for a certain time period and then selling it, hopefully, for a profit is generally considered a more popular option amongst traders who are investing in the long term. Unless the cryptocurrency you have bought it’s a value of $0, there is a minimal risk of losing your entire investment when you opt for this approach. Signing up on an exchange is also straightforward and can easily be done, even by novices. However, you should know that if you decide to indulge in exchange trading, you will have to contend with higher spreads associated with this option.
Also, there are also some risks and threats inherent in exchange trading, such as security risks, especially if you don’t do the research necessary for choosing a reliable exchange. Moreover, traders are also required to open a cryptocurrency wallet for storing their crypto coins, which is regarded as a hassle by some because the wallet needs to be maintained and secured. In a nutshell, exchange trading might not be everyone’s cup of tea.
Why Crypto CFD Trading is Better
Where crypto CFD trading is concerned, it is often seen as the ideal option for advanced and skilled traders who are interested in adopting short-term positions. CFD trading with StsRoyal can provide traders’ access to lower spreads and this allows them to capitalize on any price movements in the short term. Another advantage that crypto CFD trading has to offer is the fact that there is a potential of making a profit, regardless of whether the market is rising or falling. There is also the fact that margin trading makes it possible for all profits to be magnified. But, then again, margin trading also means that CFDs are very risky because just like gains are increased, there is a very real possibility that your losses will also be substantial. Furthermore, the volatile nature of cryptocurrencies simply add to this risk as it can be very difficult to predict.
As a matter of fact, the regulator even issued a warning in November, 2017 that described crypto CFDs as highly risky, which means that every trader needs to proceed with them cautiously as with any type of investment or trading. This is also why choosing a trustworthy broker is very important. You can read the following StsRoyal reviews from the web to do your own research before investing.
The most important thing that traders should remember when they are trying to decide how to trade is that both options can provide you with positive results in the right circumstances. Similarly, if things go wrong, you can also suffer from sizable losses. As far as choosing an option is concerned, it can depend on every trader’s style, their trading habits as well as the amount of risk they are willing to take. For instance, traders who are interested in the long term are better suited for exchange trading whereas investing in crypto CFDs with StsRoyal is a good idea for those keen with short-term trading options.
No matter what option you choose, both of them can provide you with a way of entering the cryptocurrency market and benefitting from their movements. It is a growing market and more and more cryptocurrencies are introduced on a daily basis. The best way to minimize your risk, regardless of the trading option you choose, is to do your research and increase your knowledge about cryptocurrencies. When you go in knowing everything, there is reduced chance of making any major mistakes that can lead to considerable losses in the future.
Some people find crypto CFD trading a tad complicated, but it gets easier once you study it properly and can provide you with sizable profits. Exchange trading is easier and also profitable, but the level of profit depend on your investment and also your expertise. Hence, you can weigh the pros and cons of each option and decide what you are comfortable with.