When trading Bitcoin and Ethereum — two most popular cryptocurrencies — traders do have a choice. Cryptocurrency trading can be conducted with the help of two separate instruments: regular cryptocurrency purchase and cryptocurrency-based contracts for difference (CFDs). Both options offer short/long positions and work in a similar fashion. Yet they should be used differently depending on the behavior of the market and personal preferences of each particular trader.
|CFD||Buy and Sell|
|Multiplier||x3, x5 or x10||No multiplier|
|Stop Loss and Take Profit||Available||Available|
A contract for difference (CFD) does not involve the purchase of an underlying asset. Instead, the trader buys a right to receive the difference between the current and the future asset prices — but only if the trend direction is predicted correctly. Otherwise, the trader himself will incur losses comparable to potential earnings.
Some believe that CFD trading is more suitable for short-term operations. Cryptocurrency CFDs can usually boast lower spreads than cryptocurrency trading. A lower spread, in turn, makes it easier to open interim positions and capitalize on lesser price movements, reflecting the speculative nature of this instrument.
CFD trading is also known for the use of a multiplier. In regular cryptocurrency trading the investor has no access to borrowed capital and can therefore only invest the money he directly controls. A multiplier, that can be set at x3, x5 or x10, gives you a chance to control the position that is bigger than the amount of money at your disposal. Say, you make a $100 investment with an x10 multiplier. The profit you make and the losses you incur in this case will be calculated as though you are controlling a $1000 position. This feature, however, should be used with caution as unexpected price swings can obliterate the position completely.
Buying and selling cryptocurrencies is usually associated with long-term positions, and for a good reason. ‘Buy and Hold’ is one of the most popular tactics, adopted by cryptocurrency traders all over the world. With Bitcoin and Ethereum growing more than 140% in less than two months, it is easy to understand why this approach is growing in popularity every day. As a rule, the spread is higher for regular cryptocurrency transactions than in case of contracts for difference. A higher spread in this case is negated by a substantial increase in value and relatively low number of deals. This approach is usually associated with making a long-term investment instead of harnessing speculation benefits in the short run.
Cryptocurrency trading does not involve the use of a multiplier and, therefore, implies less risks than CFD trading. It is literally impossible for a trader to lose all his money unless the cryptocurrency he purchased hits the price level of $0. Short-term exchange rate fluctuations have little to no effect on long-term positions. By simply holding the position open, the trader can avoid temporary downfalls and wait for the price action to go back up.
Both instruments allow the use of stop loss and take profit levels. This option can come in handy taking into account the unpredictable and highly volatile nature of the cryptocurrency market. By opening a take profit order, you determine the amount of profit you consider sufficient to exit a trader and close your position. Stop loss, in turn, is aimed at minimizing possible losses, letting you withdraw the rest of your funds when the price level hits a predetermined level.
As always in trading, there is no ultimate answer to the question “What is better?” Both instruments, if used correctly, can provide impressive results. Especially, when considering growth potential and high volatility of the cryptocurrency market. However, each of them is best suited to a particular market cycle and should be used in accordance with long or short-term strategies. Several more cryptocurrencies can be expected to make their way to the CFD section of the IQ Option trading platform in the foreseeable future, thus making the use of contracts for difference even more lucrative and versatile.