As cryptocurrencies continue to gain traction, more and more people are interested in trading them or investing in them. At the moment, there are mainly two ways one could invest in or trade cryptocurrencies.
- The first one is by trading cryptocurrencies on the so-called “crypto” exchanges.
- The second way is about trading contracts for difference (CFDs) of cryptocurrencies.
Both ways have some advantages and disadvantages and we look at them below.
Trading cryptocurrencies on crypto exchanges
This is the classic way in which one can invest or trade cryptocurrencies. Essentially, a crypto exchange is the place where different cryptocurrencies can be bought or sold, much like stocks of companies are traded on stock exchanges.
Some of the most popular and most liquid crypto exchanges include Coinbase, Bitfinex, Gemini, HitBTC, and others. Everything takes place online on these exchanges. The trader signs up on their website and can then instantly start trading cryptocurrencies. A wide range of digital coins are offered on the different exchanges and not all cryptocurrencies are found on all of the exchanges.
Further, not all exchanges are the same and will usually have different trading conditions. Discrepancies between prices of the same cryptocurrency on two different exchanges are also common. You should always do some research before choosing an exchange, especially because these investment opportunities are still new and largely unregulated.
Trading cryptocurrency CFDs through regulated CFD brokers
Trading CFDs of cryptocurrencies is the same as trading CFDs of other financial assets like Forex, stocks or commodities. It is done by signing up with a CFD broker who offers cryptocurrencies for trading. Like all CFD trading, you are not actually owning or investing in the cryptocurrency, but rather you are only speculating on the price changes over time and pocket or lose the differences.
The advantages with CFD trading over crypto exchanges is that most CFD brokers (at least in developed countries like the UK) are better regulated than the crypto exchanges. This means better security of funds and safety from potential frauds and scams. With a regulated CFD broker, the client is under the full protection of regulatory bodies, e.g. the FCA in the UK.
However, there are some disadvantages with CFD trading as well. You will be charged negative swaps on both long and short positions held on cryptocurrencies and this makes CFD trading not that suitable for longer-term crypto investing.
Furthermore, CFD trading of cryptocurrencies is in no way safer in terms of the nature of the cryptocurrencies’ volatile price swings. In fact, the high leverage which is normally offered on CFD products can make the wild price swings even worse and can cause a quick loss of capital for the trader. Losing your money by trading does not fall under the protection of any regulatory body and that is solely and entirely the responsibility of the trader.
So, unless you fully understand the investment product, you should be careful before you choose to trade CFDs because leverage can lead to losses that are higher than your initial deposit!
So, we can conclude that, essentially, similar to other assets, trading cryptocurrencies on exchanges would be more suitable for longer-term investing, e.g. the buy and hold strategy. CFD trading, on the other hand, is more suitable for investing of speculative nature - that is looking to pocket the difference between the price swings in the underlying asset which traded.