The cryptocurrency market’s decline has continued this year following last year’s plunge. The price of the world’s biggest cryptocurrency, in terms of market cap, bitcoin, has plunged to new multi-year lows—currently trading at about $3,357. Other cryptocurrencies including Ether, Litecoin, and Ripple have also experienced massive declines.
This has left the market reeling with skepticism, with some already contemplating pulling out their investments in the cryptocurrency industry. This type of sentiment has continued to cause uncertainty, which makes the market even more volatile. Under the current circ*mstances, investors will probably be looking at ways of investing in cryptocurrencies without necessarily buying them from a cryptocurrency exchange.
This means that should the market continue to experience high levels of volatility, traders won’t be at risk of incurring losses because they couldn’t find a buyer when they wanted to sell. This can be done by trading crypto CFDs. So, what are the benefits of trading crypto CFDs as compared to ‘HODLing’?
The benefits of investing in crypto CFDs
No commitment to ownership
Just like stock CFDs, traders trade based on the underlying price of the asset, without committing to own the stock. This can be very useful especially for day traders when the crypto markets are choppy.
Trading on margin can magnify your profits
Most CFDs brokers provide traders with leverage on CFDs of up to 5:1, which means that if you invest $500 in say, BTC/USD and apply the 5:1 leverage, then you could make profits five times what you would have made on a regular cryptocurrency exchange. And due to a variety of markets present, which include forex, commodities, stock CFDs and indices among others, traders trading crypto via CFDs tend to enjoy more liquidity than those trading via traditional crypto exchanges.
No need for cryptocurrency storage wallets
A cryptocurrency wallet presents one of the most common loopholes that cryptocurrency hackers exploit to steal from unsuspecting traders. With crypto CFDs, there is no need for a crypto wallet, and this reduces one of the key vulnerabilities of the cryptocurrency industry.
Top-notch customer support
Unlike in cryptocurrency exchanges where customer support is nearly non-existent, CFDs brokers provide their traders with 24/7 customer support on technical issues, withdrawals, and deposits. You would be lucky to find such a support mechanism on a traditional cryptocurrency exchange.
Utilize stop loss to minimize potential losses
There are a lot more benefits that traders can gain by trading cryptocurrencies via CFDs. Stop loss is one good example, but some brokers provide more tools for the trade. One of the leading crypto CFDs brokers eToro, for instance, allows crypto traders to practice copy-trading. Traders can simply copy the trades of expert traders and enjoy the profits. There is a great eToro review that discusses all these features more comprehensively.
Potential risks of investing in crypto CFDs
The risk of trading on margin
Trading on margin can amplify your profits, but this also applies to losses. When trading CFDs, traders try to predict the direction of the movement of the price of the underlying asset. If they predict an increment and the price increases, then the difference becomes a profit. However, if instead, the price declines, then the difference becomes a loss. As such, traders are required to cover that loss with their funds in the trading account. The twist here is thatthey lose if they used 5:1 leverage, then the loss is magnified five times. This also means that you could lose more than the amount you have deposited with your crypto CFD broker.
Unsuitable for long-term traders
While day traders will enjoy trading cryptocurrencies via crypto CFDs, those looking to invest long-term have a different experience. CFDs brokers charge an overnight fee for traders that are not closed within a day’s session. There are also weekend charges for trades held longer. These fees can cumulate substantially and have an impact on profits.
(Featured image byViktoriia Hnatiuk via Shutterstock)
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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
Related Topics:CFDscryptocrypto investingcryptocurrency exchangedigital assetsfeaturedinvesting
Nicholas is a financial analyst by profession with extensive experience in investment research and stock market analysis. He runs a growth investing blog CAGRValue.com. Some of his market analyses have been featured on leading investment research sites like Seeking Alpha TalkMarkets, Gurufocus, and of course, Born2Invest. As a private individual investor, he focuses on undervalued plays and growth stocks, but his writing is much broader, covering the stock market, commodities, Forex, real estate, personal finance and disruptive technologies.
FAQs
Short Selling in CFDs: CFDs allow traders to profit from falling markets by short selling, a strategy not readily available in direct investing. However, this strategy is high risk, particularly in the unpredictable cryptocurrency market.
What are the pros and cons of CFD? ›
Some advantages of CFDs include access to the underlying asset at a lower cost than buying the asset outright, ease of execution, and the ability to go long or short. A disadvantage of CFDs is the immediate decrease of the investor's initial position, which is reduced by the size of the spread upon entering the CFD.
What are the risks of CFD trading? ›
CFDs are attractive to day traders who can use leverage to trade assets that are more costly to buy and sell. CFDs can be quite risky due to low industry regulation, potential lack of liquidity, and the need to maintain an adequate margin due to leveraged losses.
What is a CFD in crypto? ›
This financial product is known as “contract for difference” or a CFD. A CFD allows you to obtain an indirect exposure by opening long (buying) or short (selling) positions in an underlying asset such as security, commodity, index, cryptocurrency and other asset types.
Is crypto CFD trader legit? ›
In many countries, trading CFDs, including Bitcoin CFDs, is legal and regulated.
Can you lose money on CFD? ›
CFD trading, like any other form of online trading, involves risk. While a percentage of traders may gain profits and celebrate the rewards of CFD trading, a considerable percentage incurs losses. As it has been proven, historically, most people who start online trading fail.
What are the benefits of CFD? ›
CFD Simulation's benefit. CFD simulation is a powerful tool for engineers and scientists to analyze the behavior of fluids and gases in a wide range of applications. CFD simulations can provide detailed information about the flow of fluids and gases, such as velocity, pressure, temperature, and turbulence.
Why are CFDs banned in the US? ›
CFDs are illegal in the US because they are an over-the-counter (OTC) trading product. OTC trading products aren't listed on regulated exchanges like the New York Stock Exchange (NYSE), bypassing US regulatory bodies. However, US traders have alternatives such as forex, options and stocks.
What is the problem with CFDs? ›
There are three problems with the conventional CfD: produce-and-forget incentives, distortion on intraday and balancing markets, and the fact that volume risks remain unhedged.
Is it safe to invest in CFD? ›
CFDs carry risk in the same way that any financial product carries risk – if the market moves against you, you lose money. However, the risks associated with CFDs can be greater because they are leveraged products.
You should never trade with money that you can't afford to lose, but there are ways to mitigate the risk. This is where CFDs are very different from gambling. The latter is purely based on luck, while CFDs require a degree of skill, knowledge and experience to help achieve the best results.
Can you trade CFDs in the US? ›
As previously mentioned, trading CFDs in the U.S. is illegal. This is because they are an over-the-counter investment product that can't be regulated by traditional financial institutions. But the good news is, trading CFDs in the United States is only illegal for citizens.
Why invest in CFD? ›
CFDs enable you to stretch your investment capital further, as you only have to deposit a fraction of your trade's full value to open a position. The deposit you'll have to put down is called a margin. While this lowers the cost of opening a trade, it can also amplify your losses.
Is CFD trading real or fake? ›
It is as real as any form of traditional investing or trading but has some unique aspects that set it apart from other forms of investing or trading. One of the reasons for CFDs' appeal is that a contract for difference (CFD) allows you to trade a currency pair, a stock, an index, or a commodity without owning it.
Why is CFD trading so hard? ›
This requires constant vigilance of the market and price movements. As well as the use of effective risk management to safeguard funds. Some of the most popular risk management tools used in CFD trading are stop-loss and take-profit orders.
Is CFD trading high risk? ›
Risk warning: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.2% of retail investor accounts lose money when trading spread bets and CFDs with this provider.
What are the drawbacks of CFD? ›
Disadvantages of virtual experiments with CFD:
- errors may occur due to simple flow models or simplified boundary conditions.
- possible uncertainties caused by too little computing values per cell and hence therefore resulting interpolation errors.
- computation time may extend for large models.
Fluid Dynamics present both advantages such as efficient system design, problem-solving, and safety, and disadvantages such as mathematical complexity, approximations and assumptions, and high computational costs.
What are the challenges of CFD? ›
CFD still faces several challenges that need to be addressed. The turnaround time associated with CFD is one of the factors limiting the use of CFD in the design and creation of databases and also in multi-disciplinary applications. Another limiting factor is the level of skills required of the user of CFD.
