When trading Bitcoin and Ethereum, which are two of the best cryptocurrency for long term, traders do have two options. Cryptocurrency trading can be carried out using two different separate instruments, which are regular cryptocurrency purchase and cryptocurrency CFD (a crypto-based Contract for Difference), such as bitcoin CFD.
Both options offer short/long positions and operate similarly. Yet they should be used separately depending on the performance of the market and personal choices of the individual trader.
A CFD (Contract for Difference) does not involve buying an underlying asset, but instead, the trader purchases a right to receive the difference between the current and the future asset prices, only if the trend direction is correctly predicted. If the trend direction isn’t correctly predicted, the trader will incur losses equivalent to potential earnings.
CFD vs stock
Some investors believe that CFD trading is more fitting for short-term trades. Cryptocurrency CFDs such as bitcoin CFD trading usually enjoy lower spreads than regular cryptocurrency trading. A more moderate spread, in turn, makes it easier to open positions and take advantage of the lower price movements, showing the speculative quality of this particular instrument.
CFD trading is also popular for the use of a multiplier. In conventional cryptocurrency trading, the trader has no access to borrowed funds and therefore, can only invest the capital he directly controls. A multiplier that can be fixed at x3, x5, x10, x20 or x25 gives investors an opportunity to control the position that is bigger than the number of funds at their disposal. For instance, an investor makes a $100 investment with the multiplier set at x10. The profit such individual will make, and the losses they incur in this case will be estimated as though they are controlling a $1000 position. However, this functionality should be used carefully as unexpected price fluctuations can obliterate the position entirely.
Buying and selling digital currencies is usually connected with long-term positions and for a genuine reason. ‘Buy and Hold’ is one of the most common approach, embraced by crypto traders all over the world. With Bitcoin and Ethereum increasing more than 140% in less than two months, it is easy to understand why this strategy is growing in popularity daily.
Generally, the spread is higher for regular cryptocurrency trades than in case of contracts for difference. In this case, a higher spread is negated by an ample appreciation in value and relatively low amount of deals. This strategy is usually associated with making a long-term investment instead of taking advantage of speculation benefits in the short run.
Stocks vs cryptocurrency
Cryptocurrency trading does not require the use of a multiplier and, therefore, incur fewer risks than a conventional CFD trading. It is impossible for an investor to lose all his funds unless the cryptocurrency he bought hits the price level of $0. Short-term exchange rate changes have little to no effect on long-term positions. By just holding the open position, the investor can bypass temporary price slumps and wait for the price movement to go back up.
Both instruments have the stop loss and take profit options. This options can come in handy acknowledging the unpredictable and high volatility of the digital currency market. By opening a take profit order, traders decide the amount of profit they consider sufficient to exit a trade and close their position. On the other hand, stop loss is aimed at reducing possible losses, letting investors withdraw the rest of their funds when the price level hits a decided level.
Is CFD trading good
In trading, as always, there is no final answer to the question “What or which option is better?” If used correctly, both instruments can yield impressive returns. Particularly, when considering the growth potential and highly volatile nature of the cryptocurrency market. Each of them, however, is best suited to a particular market cycle and should be used per long or short-term strategies. Many cryptocurrencies can be expected to make their way to the CFD section of the most forex brokers’ trading platforms in the nearest future, thus making the use of CFDs even more lucrative and versatile.