For the past year, I’ve been trading bitcoin via CFDs and also through exchanges. While both are potential ways to make money, I feel that trading CFDs offer some advantages over trading bitcoin directly at an exchange.
Here are some of the reasons I love trading Bitcoin CFDs. But first up let me explain what a CFD is:
What is a Bitcoin CFD
CFD stands for Contract For Difference. It’s classed as a derivative. Basically, you never actually own the underlying asset, and instead you are trading on the price of that asset. It works just like regular trading – if you open a buy/long position and the price of the asset rises, you’ll make a profit. If you open a sell/short position, and the price drops, you’ll make a profit.
CFDs have been around for a long time and are a common investment product. But only recently have brokers started offering CFDs for cryptocurrencies.
But why trade Bitcoin through a CFD and not just buy/sell bitcoin through an exchange? Well here are some of the reasons…
Opening Short Trades
If you believe that the price of Bitcoin will drop, you’re able to short the currency by opening a sell/short trade. This is something you can’t do when you hold actual bitcoin. As a trader, this gives you much more flexibility when it comes to your trading strategy.
High Frequency Trading and Automated Strategies
Some Bitcoin CFD brokers, such as Whaleclub offer a full API. So those with some development experience can build custom scripts to trade. Evolve Markets, another broker, allows scalping and high frequency trading through their MT4 client. This type of trading is much more difficult on Bitcoin exchanges as they just aren’t built to handle this type of load.
Speed of Execution
Generally execution speed is extremely fast with CFDs. Exchanges rely on volume – so if there aren’t many people trading, your order won’t get filled. Brokers on the other hand are plugged into liquidity providers which offer guaranteed and often instant execution. As a trader, this means you can quickly react to market movements.
Leverage allows you to control a larger position with a small amount of capital. Skilled traders will be able to use this to their advantage, and even when the markets aren’t moving much can make +XXX% in a single trade! Of course leverage does increase risk, and this is definitely something to watch out for.
Bitcoin exchanges suffer from an issue of trust. Exchanges have closed down out of the blue, money has been stolen and attacked by hackers. One advantage of brokers is that many are fully regulated and your funds are kept segregated and often insured. Brokers have to comply with regulation where as bitcoin exchanges aren’t currently regulated.
Depending on which broker you use, your fees will be minimal. There is usually no cost in opening or closing trades. You simply pay a spread (which is the difference between the sell and buy prices). Some brokers will charge financing fees and thats something to watch out for. But in general it will be much cheaper to trade through a CFD broker.
Some Bitcoin CFD Brokers to try
More and more brokers are adding cryptocurrencies to their platforms. There are a few that I have used and can recommend. eToro is my favorite. They have an excellent interface and also offer copy trading. Whaleclub is a close second. They also have a great interface. If you’re used to using an MT4 (metatrader) broker, then I recommend Evolve Markets.