Difference between Buying Crypto CFD and Buying Crypto

Beginner’s Guide / 18.03.2021

Cryptocurrencies remain one of the most exciting assets that online traders will ever have. The industry is slightly above a decade old, and there are thousands of crypto-millionaires already. Anyone can get filthy rich through cryptocurrency investments, although it still comes with a host of risks.

Volatility is a significant drawback in the crypto world and why many people have remained skeptical about cryptocurrencies for a long time. Most people are afraid of holding crypto coins due to price volatility issues and are thus locked out from the lucrative crypto trading.

However, crypto enthusiasts who fear holding cryptocurrencies can now profit from the industry without necessarily buying coins through contracts for difference. In this article, you will understand crypto CFDs and the difference between buying crypto coins.

Buying Cryptocurrencies

Unlike CFDs, individuals can buy and own cryptocurrencies. Many cryptocurrency investors own more than one crypto coin, which they manage altogether as their investment portfolio. They also have the option of owning units of cryptocurrencies and trade with portions of the asset.

To buy cryptocurrencies, you need to sign up for an exchange platform first, buy your preferred coin using fiat currency or other crypto coins, and then store it in your digital wallet. If your sole purpose is to trade, you can set up a wallet with an exchange platform as it will be much easier to start trading.

However, you must maintain your wallet’s keys to avoid losing them or unauthorized access, as you could lose all your crypto holdings. Also, the security of exchanges has been questionable, following hacking instances that result in the loss of cryptocurrencies. In terms of cryptocurrencies, you own the assets and can decide to trade or HODL.

In trading, you buy and sell via exchanges, while hodlers keep the coins in their wallets, waiting for their value to increase. People earn profits from the actual buying of crypto coins and selling them later when their prices rise. However, digital currencies are highly volatile, and therefore, some investors still lose money when the value decreases.

What are Crypto CFDs?

CFDs are a form of crypto investments that fall under the category of derivatives. They allow anyone to earn profits from an underlying asset without owning it. The underlying asset can be a stock, index, or other assets, although it is usually a crypto coin for crypto CFDs.

Buying CFDs

Investors cannot buy a contract for the difference because they never get to own the underlying asset. Instead, they open CFD trades. CFDs take advantage of the price volatility of cryptocurrencies to allow investors to earn a profit. Individuals gain by foreseeing the trend direction of a particular cryptocurrency and lose if the trend goes against their prediction.

Anyone is eligible to open a CFD trade and predict whether the underlying coin will increase or decrease in value. In that case, it means that you can make profits on both falling and rising markets, unlike in cryptocurrency trading, where only a rising value results in gains. If you believe the coin’s value will rise, you go long and go short if you predict that the value will decrease.

Since traders do not own any crypto coins, they get their earnings in fiat currency. To open a trade, you need to pay a percentage of the total value of the trade. The portion can go up to 20% or high or even as low as 5% or less.
Therefore, you can open a trade worth $20,000 with just $1,000 if the margin requirement is 20% and receive 100% of the gains. Similarly, if your bet fails, you lose the trade’s total value, meaning you will have to pay the broker $20,000.The deposit is usually known as the margin requirement and is also made in fiat currency.

Cryptocurrency Exchanges VS CFD Exchanges

CFD Exchanges are usually brokers that provide trades of different values for CFD traders. Traders only need to open an account with a particular broker and chose their instrument. The instrument here refers to the underlying asset in which you want to trade.

If you choose a cryptocurrency, you will then proceed to declare your position or prediction. On the other hand, cryptocurrency exchanges allow users to exchange digital currencies for other digital coins or fiat currency. They support crypto enthusiasts to own, hold, and trade in cryptocurrencies.

There are many cryptocurrency exchanges and CFD exchanges. Both are avenues where users can earn profits from trading, although they have significant differences. What suits one person may not be what another trader needs, so it’s essential to understand their differences and make informed decisions.

Asset Ownership

As said earlier, traders never own the underlying asset in CFDs. If you want to own crypto coins, cryptocurrency exchanges are what you need.

Speed

In crypto exchanges, it takes a little bit of time before you can start earning. The process of buying your preferred coin and trading can take time before the transactions get verified and added to a block. Also, transactions with some currencies may take time before verification if you set low fees since miners will prioritize transactions with higher fees.

Leverage

CFD brokers provide users with leverage, a feature that is never available on crypto exchanges. You can trade CFDs with just a percentage of the trade amount and earn the full reward.

Regulation

Regulation is one of the most significant issues facing the crypto industry. Cryptocurrencies operate with no central authority, and so crypto exchanges are also free from any government regulation.

However, most CFD brokers are regulated, which gives traders some sense of security. CFD brokers can, therefore, compensate traders in case their money gets stolen from the platform.

Customer Support

CFD exchanges offer better customer support to traders than crypto exchanges. Traders may have to wait on crypto exchanges for a long time before their issues get resolved. However, CFDs exchanges may not be available beyond working hours or over weekends, while crypto exchanges are available 24/7.

Conclusion

In terms of existence, contracts for difference have been there for a long time, and perhaps the reason they are suitable when it comes to trading. Cryptocurrencies are only about a decade old, and a significant number of people do not understand the technology.

Additionally, the safety of cryptocurrencies has been questioned due to hacking incidents, plus they lack a central governing body. People are anxious about cryptocurrency trading due to the rising hype but are afraid of these aspects and, worst of all, the volatility.

CFDs are an excellent opportunity to reap profits from cryptocurrencies while keeping your distance from the crypto industry since you never actually own the coins.

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.