The Cryptocurrency market is one of the most recent establishments in the financial markets, with an estimated market size of around $1.5 billion as of 2021.
There are two ways to trade cryptocurrencies — directly or through a Contract for Difference (CFD). But what is the big difference between trading cryptocurrency vs cryptocurrency CFDs? Let’s take a look:
What is direct Cryptocurrency trading?
Cryptocurrencies are digital or virtual currencies that work as a medium of exchange through a decentralised computer network. You can directly start Cryptocurrency trading through a Cryptocurrency exchange by choosing the virtual currency you want to trade and placing a long or short order for the same.
What is a Cryptocurrency CFD?
A Cryptocurrency CFD is a tradable contract between the Cryptocurrency trader and broker that allows the trader to open a Crypto position without actually owning it. The trader has to pay the difference between the Cryptocurrency’s price at the time of contract and its current price to speculate on the price movements.
Difference between Cryptocurrency and Cryptocurrency CFDs
When trading Cryptocurrencies directly, you own them as a personal asset. Placing a buy order on a Cryptocurrency exchange directly adds the digital asset to your virtual wallet, and any increase or decrease in its rate directly affects how much of the amount you own.
For example, if you buy the BTC for $2,500,000 directly, an increase in its price to $2,510,000 will directly affect your BTC ownership by $10,000.
When trading Cryptocurrency CFDs, you do not actually own the digital asset. This is because a Cryptocurrency CFD is not precisely a digital currency but a contract you own to benefit from the fluctuating Cryptocurrency prices. This helps in minimising the direct impact on you if Cryptocurrency prices drastically change.
For example, if you own a Cryptocurrency CFD for BTC for $10,000, and the actual value of BTC drops from $2,500,000 to $2,490,000, it will not impact your transactional value directly by $10,000 but only by a small percentage (around 0.5% in our case, which is equal to $50).
To trade Cryptocurrencies directly with leverage, you first need to deposit some funds as collateral into your account, which depends on the size of leverage that you will be using.
You can borrow as much as 100 times the deposit when trading Cryptocurrency with leverage. In order to continue trading with leverage, you need to maintain the initial deposit in the account to ensure that your Cryptocurrency account is continuously funded.
Leverage with Cryptocurrency CFD is higher than trading Cryptocurrency directly. You can gain significant exposure in the Cryptocurrency market through CFDs by depositing only a small amount. CFD brokers also provide you with specific risk management systems and business models curated explicitly for trading Cryptocurrency CFDs.
Using leverage is the easiest with CFDs, as CFD brokers have been one of the first brokers in the financial markets to use leverage in trading. CFD brokers offer you several leverage ratios so that you can choose the one that fits your trading goals the best.
Since you directly own the digital currency when trading Cryptocurrency on a platform, the risk associated with the same is high as well. This is because any fall in Cryptocurrency prices will lead to a direct fall in your trade positions.
Since you do not actually own the digital asset when trading Cryptocurrency CFDs, it is a much safer and less risky trade when compared to traditional trading. Holding a Cryptocurrency CFD means that any impact in the Cryptocurrency price will have a lower impact on the CFD. Cryptocurrency CFDs also enable quicker entry and exit positions along with higher trading control when compared to direct Cryptocurrency trading.
Cryptocurrency is a relatively new asset, and hence its trading infrastructure is still being built. Cryptocurrency brokers have just started to enter the market, which is why, even now, traders face issues accessing their accounts when trading activity is high. Cryptocurrency systems have not been tested at scale as of now and are just beginning to expand their ease of use for end-users.
CFD brokers have existed in the markets for decades now, which is why they are able to react swiftly to critical market conditions. CFD brokerage systems have evolved as they have witnessed several economic crises in the past. This has led to the creation of a robust trading infrastructure in which Cryptocurrency CFD traders are able to seamlessly access their accounts even during high trading hours.
Trading Cryptocurrency directly has different regulations across the globe as each country has sanctioned their own set of rules when trading Cryptocurrency. However, the past few years have witnessed a professional regulatory framework that systemises how all Cryptocurrency brokers function across the globe to protect traders’ funds.
Trading Cryptocurrency CFDs is comparatively much safer and more manageable when compared to the traditional trading method. This is because there is no risk of theft of funds when trading Cryptocurrency CFDs since you do not own them. Client funds are protected and regulated in Cryptocurrency CFD markets just like any other CFD market due to the advancements in the CFD markets over the years.
Should you trade Cryptocurrency directly or via a CFD?
Both traditional and CFD Cryptocurrency trading come with their own sets of advantages. Whilst direct Cryptocurrency trading enables complete ownership of the digital asset, Cryptocurrency CFDs provide high leverage and minimised risk.
Start trading Cryptocurrency CFDs through Blueberry Markets today to enjoy competitive spreads, advanced trading tools and fast order execution.