Crypto Brokerage Guide
In the blockchain early days, the trading of virtual coins took place on the OTC market or via dedicated cryptocurrency exchanges, where the seller and buyer arranged to directly buy and sell directly between themselves. It's important to note the difference here. Many of these brokers are not allowing you to actually own or hold bitcoin, and this is one of the most important parts. Even though there is CFD brokers available, we want to get your sights aimed at really getting used to hodling and more important storing and managing your own assets. That's what crypto does, it puts the power of money back in your hands. So with that in mind, let's dive in and get started. We work with a partner company when dealing with over the counter brokers, check out our best choices here<<==
However, as time moved on, crypto went from being a niche thing that was only known to a small number of computer geeks to becoming an incredibly popular speculative asset that needed additional trading options and tools. This is where the contracts for difference (CFDs - can come in very handy. For decades now, it has been one of the favorite instruments for trading everything from soybeans to gold and now is broadly used for speculating on cryptocurrency price movements.
So let's take a close look at CFDs and what it can be used for to gain exposure within the cryptocurrency marketplace.
What are CFDs and how do they fit within the cryptocurrency trading market?
Contracts for Differences are a type of financial derivative that is in futures contracts form that is conducted between a broker and trader and is settled using cash payment instead of delivering physical assets or goods.
CFD traders don't actually deal directly with underlying assets. They instead are given the right to get the difference between an asset's current cost and its future value. If a trader predicts correctly the future value of an asset and pocket the difference in price. Otherwise, they will need to cover their loss, by paying the broker the price difference. The system works well for any kind of asset, which includes cryptocurrencies.
How it works
Say you are certain the price of Bitcoin is going to substantially rise soon and you would like to profit from this price movement. You could go out to a cryptocurrency exchange and purchase some coins, but this is a fairly tiresome procedure, and at times can be complicated particularly when you have an investment horizon of a few hours, and you aren't experienced in handling digital money. In that case, you can choose to purchase a contract for different, rather than purchasing real Bitcoin, or a futures contract that normally implies higher fees and longer time frames.
A majority of trading companies already have responded to this growing interest in trading crypto and CFDs were added for different digital assets to the tradable instrument lists. That means you will not have any problems locating a broker that has suitable trading options. For example, you might sign with Plus500 or another trading company for a contract for difference at the current price settlement occurring at the end of the business day.
If your prediction is right regarding Bitcoin's future price movements within the lifespan of your CFD, then the broker will pay the difference to you. However, if your forecast ends up being wrong, then you will lose money and have to compensate the broker on the price difference. You basically are betting on whether the asset price is going to decrease or increase within a certain time frame. Since neither your counterpart or you need to own actual Bitcoins in order to do this, contracts for difference provides investors a straightforward and hassle-free way to earn profits on changing conditions within the cryptocurrency market.
Cryptocurrency CFD Trading Advantages
Many traders seek out cryptocurrency exposure with reputable and established brokers CFDs since this kind of investment option comes with a number of benefits over directly purchasing and selling cryptocurrencies.
Easy To Start
Direct cryptocurrency trading frequently has technical issues associated with it. Individuals who are not very tech-savvy are at times scared by the wallet-opening procedures, which is a cryptocurrency exchange verification process as well as other crypto-related issues. They have a tendency to rely on brokerage services they are familiar with and that have one-click trading features, easy account set-ups, and longstanding customer relations. In addition to that, those who are involved in CFD trading for other types of products are more likely to make use of the instrument for adding cryptos onto their existing CFDs portfolios and benefit from the price movements also.
The most popular reason to trade cryptocurrencies via CFD is obtaining access to many high leverage opportunities. The tool allows trading using more capital than you actually have. That means with 5:1 leverage you only need to have $500 in order to open up a position that is worth $2,500 and be able to earn a large profit even on just small price movements. Since brokers are not bound by the regulatory requirements on digital assets, they are free to determine the amount of leverage they want to offer. This is why usually CFDs have usually higher margins compared to underlying assets or future contracts. However, leverage does increase both potential losses as well as earning opportunities, meaning that you must be extra careful whenever you are trading CFD on cryptos with leverage.
Most brokers offered leverage, although this option is not supported by most cryptocurrency exchanges - other than Poloniex, Kraken, and Bitmex.
Advanced technical instruments
Although trading CFDs on cryptos using a traditional broker, then you will have a wide range of risk management instruments and technology, including take profit and stop loss tools. Considering the high volatility that characterizes the cryptocurrency market, they might come in hand and help to protect you against devastating losses. At the very same time, analytic support and advanced charting tools that are offered by brokers to help you make informed investment decisions and help you make improvements to your overall performance.
When it comes to CFDs, you don't actually purchase or sell digital assets. Instead, all of your transactions get executive within a split second on the broker trading platform. That provides you with the flexibility that you need and quickly react to market movements. In the meantime, cryptocurrency transactions on the blockchain might take hours or sometimes day, depending on the network capacity and coin, meaning that traders cannot benefit from rapid changes in the market.
It is useful to have customer support when you need help on how to set your account up or make trades or have a technical problem. Although all CFD brokers offer support on multiple channels, including live chat, phone, email, and most cryptocurrency exchanges make their customers have to wait for a long time or leave them having to resolve problems themselves.
A majority of CFD brokers are regulated by FCA, CySec, or another reputable financial watchdog. That means a trading company's customers are protected better from fraud, outright theft, and bad practices. In cases of bankruptcy and other adverse circumstances, it is possible for traders to apply for compensation to receive some of all of their money back.
Cryptocurrency CFD Trading Disadvantages
For all of its value-adds and benefits, CFDs for cryptocurrencies do have some pitfalls and drawbacks that you should consider before you put any money in.
There is a price that comes with CFD crypto trading in spread form, which is the difference between the selling and buying prices. You have to pay it anyway, no matter what the trade's outcome is, and that is why you experience losses initially at the time that you enter in a crypto CFD position. The riskier and less liquid than an underlying asset is, the wider of a spread you will have to pay.
Aside from that, fees are charged by all CFD brokers for holding the CFD position from day to day. The fees are based on a percentage of the LIBOR rate and might be very high for Bitcoin as well as other cryptocurrencies due to the volatile nature. It can result in the expected price movement being higher to cover the trading commission and also provide a profit.
When you trade cryptocurrencies through a CFD broker there is a great deal of trust involved. You need to ensure that the prices from your broker's platform are aligned with the general market movements and also are sourced from one of the exchanges. There are some unfair brokers that might manipulate prices on cryptocurrencies that may lead to client accounts having unnecessary losses. Some CFD brokers might have shut their cryptocurrency trading down already, and that makes the less reliable when it comes to providing services continuously.
Best Brokers For Trading Crypto -Black Swans and Brokers
Some CFD brokers in December 2017 started reducing their cryptocurrency exposure due to the high risks associated with Black swan events and very tiny hedging opportunities via CME and CBOE futures.
Lopsided markets enabled traders to make some quick money which left brokers deep in the red and forced them to suspend all of their crypto offerings or at least limit their exposure through preventing the opening of new positions.
That is probably one of the major drawbacks that come with trading cryptocurrency with CFD brokers. Their coin lists that are available for trading are much shorter compared to some cryptocurrency exchange listings. That means that traders need to limit all of their strategies to about a dozen well-known coins and are unable to benefit from hot newcomer price movements or liquid assets.
How to select a broker for your cryptocurrency CFD trading
Among market participant, trading options for the contract for differences are gaining popularity with many brand new as well as long-existing brokers showing up an offering clients CFD trading opportunities to satisfy the growing demand.
When selecting a broker, it is critical to understand CFD trading is all based on a contractual form of a relation between the client and trading company, instead of a buy-and-sell kind of transaction. That means your loss or profit will solely depend on the prices that are registered at the beginning and end of the trade. So be sure your broker is using reliable trading information and doesn't manipulate prices. Otherwise, you won't ever be able to benefit from the price movements of cryptocurrency, no matter how precise or good forecasts are. This is a very challenging issue since there is currently no official source of cryptocurrency quotes, although price at various exchanges might be considerably different.
The following is a list of major broker that offer CFDs for cryptos
- Plus500 - Trading the most popular cryptocurrencies that have 24/7 availability and leverage. EOS, Monero, IOTA, Ripple, Neo, Litecoin, Bitcoin Cash, Ehtereum, Bitcoin.
- eToro - Provides a broad range of cryptocurrencies, including Ehtereum Classic, Dash, Litecoin, Ripple, Ethereum, Bitcoin, and others.
- Admiral Markets enables you to trade CFDs for Bitcoin Cash, Ripple, Litecoin, Ethereum, and Bitcoin with 5:1 maximum leverage.
- IG only offers CFD trading for Ehtereum and Bitcoin against GBP, EUR, and USD.
- Markets.com - with this broker you are able to trade Ethereum Classic, Bitcoin Cash, Ripple, Dash, Litecoin, Ethereum, and Bitcoin.
- XTB is a broker that offers Dash, Ripple, Litecoin, Ethereum, and Bitcoin available for trading CFD.
- FXOpen offers various coins including Peercoin, Namecoin, Emercoin, Litecoin, Dash, Ethereum, and Bitcoin.
- LMAX offers Ripple, Litecoin, Ethereum, Bitcoin Cash, and Bitcoin
Checklist for choosing CFD broker
Regulation - Ensure that a respectable watchdog regulates the broker, like CySec, NFA, FCA. That guarantees you against fraud.
Trading conditions - make sure you check the overnight financing fees, spread, and other conditions written in the fine print in your trading agreement. You need to know what all of your trading expenses are before entering the market.
Leverage - do not fall victim to the high leverage benefits, to ensure you understand all of the risks and are able to afford to lose all of your invested money in case the market turns against you. Keep in mind cryptocurrencies are prone to sharp movements and high volatility.
Do your homework - Make sure you research the information on your broker before you register your account. Check to see if there are money withdrawal issues or scam alerts, although be prepared to distinguish between genuine reviews and fake ones.
Key Takeaways. What you need to know regarding CFDS for cryptocurrencies
For day traders who are searching for a straightforward and fast cryptocurrency market exposure, CFD trading is a very hand option. Although it does have definite advantages compared to cryptocurrency exchange trading, the options for trading venues and instruments heavily depend on the individual trading systems and investment goals, which means traders need to carefully consider all of the pros and cons prior to deciding where they should trade.
- Contracts for Difference (CFDs) provide an easy way for cryptocurrency trading without needing to own assets.
- This kind of investment is well suited for intraday traders wanting to capitalize on short-term price movements on cryptocurrency.
- CFD brokers provide traditional services as well as familiar risk management and technical tools, making cryptocurrency trading user-friendly and easy for non-tech-savvy investors.
- Most CFD brokers work in a legal framework, and their activities are strictly regulated, making it less likely that any theft or fraud will occur.
- leverage trading is widely viewed to be the main advantage that comes with trading CFDs for cryptocurrency. However, it is a two-edge short that may inflict large losses or bring in huge profits.
- CFD brokers only offer limited selections of coins and have large spreads set on more volatile and less liquid assets. That means that the trader's profit might be reduced significantly by the trading fees.