Many investors confuse cryptocurrency CFDs trading with actual investing in cryptocurrency. Learn the key differences between investing and trading CFDs on crypto, the pluses and minuses of each product and how to trade the latest digital trend.
Cryptocurrencies appeared on the financial scene back in 2008 with the release of Bitcoin’s ‘white paper’. The ‘peer-to-peer electronic cash’ system welcomed in a new age in an online transaction. Bitcoin secures its transactions via a trustless system that uses blockchain technology. A digital process that verifies, records and approves transactions through complex cryptography.
Proving popular, in December 2017 Bitcoin hit a high of $19,000, but it’s not the only cryptocurrency out there. Some of the most prominent are Ethereum, Ripple, and Litecoin. Due to the increasing popularity of cryptocurrencies, more investors and traders are looking into trading or investing in these digital currencies.
Yet, many confuse investing in cryptocurrencies with trading CFDs on cryptocurrencies. To avoid any confusion we have listed the key differences between cryptocurrency CFDs trading and investing in cryptocurrencies.
What are CFDs?
Before we look at the key differences between the two concepts, let's get the definition of CFD clarified first. CFD stands for Contract for Difference, it’s a financial instrument. A CFD is a type of derivative trading, wherein one party agrees to pay the other the difference between the value of a security at the start of the contract and its value at the end of the contract.
CFDs are also a useful tool for hedging risks on exchanges and for arbitrage. Say an investor thinks the price of gold will rise, they make a contract with a broker. If the price rises, they are successful and make money, but if the price falls they lose. Grasped the CFD, but want to know more?
What are CFDs on cryptocurrencies?
Trading CFDs on cryptocurrencies means trading based on the market prices of cryptocurrency. While you never own the actual crypto coin, you can invest and make profits (or losses) on their price changes.
Cryptocurrency CFDs trading and investing; Let’s compare
| Cryptocurrencies | CFDs | |
| Where is your money kept? | Stored in digital wallets, the benefits are the ease access. The risks include loss of access to your digital wallet and exchange hacks. | In your account, assets are intangible. The benefits include segregated accounts, account security and broker services, regulated by a financial regulator. |
| Liquidity | Liquidity is limited on crypto exchanges, meaning crypto assets are not always easily convertible into real-world comparatives. Their value is also highly volatile – losses and gains come quickly. | With CFDs you can buy contracts at the indicated price. Also, you’re not tied to the asset, you only trade its price movements, so you’re free to switch between markets. |
| Usage | Cryptocurrencies offer flexibility of payment, cryptocurrencies can be exchanged, sold or gifted. | CFDs cannot be used for shopping, exchange or sending to a friend. As you do not own the currency itself, you are only trading on its price movements. |
| Regulation | The cryptocurrency ‘peer-to-peer’ transaction system is largely unregulated. As a newcomer, it lacks a legal ecosystem. This means traders do not benefit from protection from Investor Compensation Fund and cannot refer to the relevant Financial Ombudsman should problems arise. Additionally, exchanges can be located in shady jurisdictions. | CFD trading can only be offered by regulated companies that follow set policies to protect the business and their clients. These regulations include the segregation of client’s money, meaning trading is more secure, projection against fraud, account security standards and data protection to ensure the trading process is as safe as possible. |
| Commissions | Cryptocurrency trading involves commissions on selling and buying the cryptocurrencies. | With CFDs, there is no commission taken on buying and selling, overnight fees may be incurred if your position is open after the end of the trading day. |
| Length of investment | In general, cryptocurrencies are considered a long-term investment, however shorting is possible. | CFDs are by nature short-term investments, offering traders variety in their choice of trades. |
| Illegal activity | There have been cases where cryptocurrency has been related to terrorism or other illegal activities. Due to the lack of regulations criminals can easily send more via these cashless transactions. Traders should always be careful with whom they trade. | CFD trading is strictly regulated so such problems do not occur in this type of trading. |
| Taxes | Cryptocurrency traders are required to pay tax on their earnings. However, with crypto it’s more complicated as not all countries have developed a sufficient tax infrastructure or legislation to support this. | With CFD trading, tax payments are clear. As it is well regulated, it is more straight-forward to explain losses and gains in tax reporting. |
How to trade the Crypto?
Trading cryptocurrencies involves buying and selling digital assets with the aim of making a profit. Here are some steps to get started:
1. Educate Yourself: Learn about different cryptocurrencies, how blockchain technology works, and the basics of trading.
2. Choose a Reliable Exchange: Research and select a reputable cryptocurrency exchange that suits your needs. Popular options include Coinbase, Binance, and Kraken.
3. Create an Account: Sign up for an account on the chosen exchange and complete the verification process.
4. Secure Your Account: Enable two-factor authentication (2FA) and consider using a hardware wallet for extra security.
5. Deposit Funds: Transfer funds from your bank account or another cryptocurrency wallet to your exchange account.
6. Start Trading: Choose the cryptocurrency pairs you want to trade and decide on a trading strategy. You can buy and sell cryptocurrencies based on market trends, technical analysis, or news events.
7. Manage Risk: Set stop-loss orders to limit potential losses and only invest what you can afford to lose.
8. Stay Informed: Keep up with the latest news and developments in the cryptocurrency market to make informed trading decisions.
9. Track Your Performance: Monitor your trades and analyze your performance to learn and improve your trading strategy over time.
Remember, cryptocurrency trading can be highly volatile and risky, so it's essential to do thorough research and only invest what you can afford to lose.
You must remember that you trade at your own risk. You can lose all your invested capital once you begin trading. Do not in any circumstances trade with money which you cannot afford to lose.
78.1% of retail CFD accounts lose money.