Cryptocurrency CFDs have already become a staple strategy of trading with digital assets. Many crypto traders have abandoned their favorite cryptocurrency exchange in favor of CFD brokerages. This does nothing but harm to the market as circulation keeps on decreasing.
But why do people choose CFDs for assets that can be traded by themselves? Why are traders abandoning the digital currencies in favor of virtual contracts?
Crypto CFDs offer more profit
One of the main reasons that people go for crypto CFDs is the additional income that can be generated through them. Although all of the crypto prices are identical to those on the largest exchanges, CFD brokers are still able to incorporate a feature that very few can ignore.
It was not long ago that some of the largest CFD brokers noticed the popularity of the blockchain and tried to incorporate it as fast as possible. The biggest impact happened during the 2017 crypto bull rush when nearly everything jumped about 1000%. Most brokers at that point were focusing on CFDs on stocks or commodities, therefore adding cryptos was a piece of cake.
According to IQ Option reviews on the web, the CFD broker was one of the first to introduce the option. In fact, it was the first CFD broker that revolutionized cryptocurrencies by offering leverage on them.
Naturally, this wasn’t crypto trading at its finest, but due to the prices increasing at a rapid pace, ignoring 1:100 leverage was something traders simply could not afford.
Leverage is distinctive to a margin trading platform, which is not common with crypto exchanges. Therefore, the only option at that time was to go for CFD platforms, and it has stuck to this day.
However, the margin trading option was quickly being adopted by some notable names like Cryptopia, but soon after the hack, the hype calmed down. About a month ago, some Reddit users also speculated that Binance was in the process of introducing their own version of margin trading because some odd code functions were noticed in the API update. But since Binance was also hacked twice this month, it’s very unlikely that margin trading will be available any time soon.
CFDs offer more security
2018 was plagued by multiple crypto hacks back to back. Therefore many traders simply stopped keeping their assets on an exchange’s hot wallet. Most of them opted for hard wallets, which does offer more security but is much harder to trade with effectively.
CFD brokerages were considered as a safe way of participating in the cryptocurrency market while also benefiting from all the extra profit opportunities. Therefore most speculators simply liquidated their crypto assets and then re-invested in the very same coins after they registered on the CFD platform.
There was no need for a crypto wallet and if something were to happen with the funds that were not the fault of the investor themselves, the regulation that the CFD broker was adhering to would compensate them. It basically created a safe environment for trading cryptos while not owning them.
Unfortunately, however, this is where the benefits of crypto CFDs finish and the disadvantages begin. Disadvantages that many traders were not aware of in the beginning.
CFD trading is costly
In order to invite as many customers as possible, CFD brokerages had to offer attractive leverage, which was already mentioned above. Providing these funds for traders to use was no small feat, therefore some the spreads needed to be very small. The tighter the spread, the less money the broker makes, therefore it needed to be compensated somehow.
The compensation methods were fees on pretty much anything. Placing, prolonging, maintaining and closing a trade all had fees assigned to them. Therefore most traders saw all of the promised profits go towards fees.
It was not unheard of to have all of the profits generated from a single trade be wasted on fees if they weren’t high enough.
Furthermore, waiting out a bear market was pretty much impossible for the traders. As mentioned, maintaining an open position came with its fair share of fees as well. Most CFD trades are open for 24 hours, after which they are subjected to “overnight fees”, which the trader needs to pay in order to keep it open. If they fail to do so, the trade will close even if the profit is meager or non-existent.
HODLing as a trading strategy was quickly thrown out of the window and most traders started relying on small gains during the day to form a relatively successful month. Which meant that more and more time needed to be devoted to micro-management. Over time, the crypto market fell so much that trading CFDs on cryptos was simply not profitable anymore. But thanks to the new bull rush we are seeing this month, the demand may increase once again.
Crypto CFD popularity depends on the bull
As long as the crypto market keeps growing, crypto CFDs will always remain as an option. They may have sudden drops in trading volumes during bear markets, but a small bull rush is enough to make it boom.
Seeing how Bitcoin is currently carrying most of the market on its journey upwards is a clear sign that crypto CFDs will once again regain popularity.
What most traders need to know is the predicament they may find themselves in, if they decide to switch platforms. Overall there are a few things that need to be considered when trading crypto CFDs:
- You don’t own the cryptos you trade
- Fees will be a constant bother
- You can’t maintain long-term positions
However, the opportunity of increased leverage may be what’s keeping traders attached. But due to ESMA’s restrictions in Europe slowly becoming permanent, we may see most traditional crypto trading volume come from the EEA, while Asian markets and the US could migrate over to CFDs.