The Difference in Trading Cryptocurrency CFDs and Spot Crypto

by Gregor Emmian, Marketing Manager at HYCM

This has led to many non-crypto traders showing interest in this new and intriguing yet risky asset class.

Ever since the first bitcoin block was mined some twelve years ago, you had to use a cryptocurrency exchange if you wanted to trade crypto. This meant taking possession of the assets you were trading and either holding them on the exchange itself or learning how to use a personal crypto wallet in order to take custody of your crypto. The learning curve associated with cryptocurrency trading, and the risks involved in holding your own assets, have been obstacles to the broader adoption of cryptocurrencies. However, there are other ways to trading cryptocurrencies.

Contracts for Difference

CFDs have revolutionised access to foreign exchange, equity, commodity, and many other markets by allowing investors to trade the price swings of the underlying asset without having to take the possession of the assets themselves.

Using CFDs to access crypto markets instead of outright purchasing comes with a number of other opportunities, as well as challenges that traders and investors ought to be aware of.

Leverage

CFD brokers were among the first to pioneer the use of leverage in retail trading. We have been doing it for many years and have developed the business models and risk management systems required to make leveraged trading a reality.

It should go without saying that leverage should be used judiciously as part of a sound money management strategy because it has the potential to multiply losses as easily as it multiplies profits. But, from the perspective of a retail trader who wants the option of using leverage on a trade-by-trade basis, it’s difficult to find an instrument that makes this process as accessible and simple to grasp as a CFD.

Over the years, some cryptocurrency exchanges have added leveraged trading to their own offering, but you have to keep in mind that their core business is in offering spot crypto, rather than derivatives. For this reason, trading crypto on margin in an unregulated market like crypto comes with extra risks, which brings us on to the next point.

Managing Risks

Cryptocurrency is a volatile market known to make large sudden moves. Bitcoin has been a prime example of this, making it a very risky asset to trade; for day traders especially, this level of volatility can be too much to deal with. On the other hand, comparing to spot crypto trading, CFDs offer more control over trading with quicker trade entry and exit, stop-loss orders to manage your risks, and position sizing that allows you to use less than 1:1 leverage.

Regulation & Safety of Funds

In the earliest days of our own industry, we experienced a period of rapid expansion with little to no regulatory oversight, which can lead to many excesses and disreputable trading practices among less scrupulous brokers. Over the decades, a professional regulatory framework has evolved to weed the bad apples out and ensure that brokers are well-capitalised and take sufficient steps to protect their clients’ funds.

A framework such as this is only just starting to emerge in crypto markets and so it should be stated that regulation and protection of client funds is a major advantage of trading crypto with a CFD broker than on a crypto exchange. For our part at HYCM, we were one of the first retail brokers to gain UK FCA regulation, and are also currently regulated in Europe via our CySEC license, in the UAE by the DIFC, allowing us to offer forex, commodities, indices, stocks, and other global regulatory bodies for trading and cryptocurrencies*.

The Speed of Withdrawals

Much is made of the almost instantaneous nature of crypto payments. For traders though, it’s the speed at which they can withdraw profits from their trading accounts into their bank accounts that’s most important.

While crypto exchanges are indeed extremely quick at moving crypto from one wallet to another, withdrawals in fiat currencies can often take several days, and that’s in jurisdictions that allow bank deposits from crypto exchanges; many countries still don’t.

At HYCM all withdrawals are processed in 24 hours or less, ensuring that clients who trade crypto with us enjoy a seamless experience between the financial markets they trade and their own personal bank accounts. What’s more, HYCM clients can also withdraw in cryptocurrency, a rare feature among CFD brokers.

Trading Tools

Platforms and trading tools are often overlooked when comparing CFD brokers to crypto exchanges; nevertheless, it’s an important comparison to make. Over the years certain standards have developed in our industry that are the product of decades of development, the input of hundreds of thousands of traders, and hundreds of billions in real volumes traded.

Most crypto exchanges are at the very beginning of this journey. As a result, the user experience and the power of the trading tools on offer is still lacking. As an example, aside from offering the industry-standard MT4 and MT5 platforms, HYCM traders benefit from a number of important value-added services such as technical and sentiment analysis from Trading Central, news and commentary courtesy of Financial Source, and Seasonax’s suite of seasonal analysis tools.

Trading Infrastructure

The robustness of our trading infrastructure is definitely another point that traders should be aware of. CFD brokers have been battle-tested over the years in a number of critical market scenarios, from the Dotcom crash, the GFC, the European debt crisis and the SNB unpegging, to the Pandemic and now the Ukraine crisis. These events have pushed brokerage systems to the very limits and forced them to evolve. Many crypto traders still report trouble accessing their exchange accounts during times of elevated trading activity, because these exchanges are only now beginning to have their systems tested at scale.

The risks of trading CFDs

Nevertheless, trading crypto CFDs carries a number of risks.

The main risk is that you have the option to use leverage. If your leverage levels are too high then relatively small movements in price can mean losing your entire deposit if you have set your leverage levels too high.

By easily being able to enter and exit markets you risk over-trading. Each time you trade you pay a commission. By entering and exiting multiple times you incur more fees as well as risk being too sensitive to minor changes in the news.

A CFD has no underlying ownership. So, there is no dividend to collect for holding the asset.

CFDs are generally well-suited for shorter-term investments. Longer-term investments may typically be better suited to instruments other than CFDs.

Final Thoughts

At HYCM, in order to make our offering as useful to our existing clients as it is attractive to potential newcomers, we maintain a focused CFD selection of some of the most relevant crypto assets. This helps filter out a lot of the noise in the broader crypto space. To help bridge the gap between both worlds, we offer crypto deposits and withdrawals, allowing crypto traders to try our services.

Finally, we also offer a variety of topical news and analysis on the crypto markets for our clients and plan to continue expanding this coverage going forward. An example of this commitment is our free upcoming webinar “Bitcoin & Cryptocurrencies: How to trade these volatile markets” with Giles Coghlan, Chief Currency Analyst, on the 22nd of March at 14:30 UTC. We invite you to join to learn about the impact of volatility in trading crypto markets, managing risk, new market opportunities, limiting leverage, and much more.

Register for the webinar

*Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and HYCM Capital Markets (UK) Limited.

About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.