Skip to content

How to Choose a Cryptocurrency Broker

In the beginning of blockchain the virtual currency was traded on special cryptocurrency exchanges, or through the OTC market which was where the seller and buyer were able to buy and sell the coins directly between them.

As time went by the crypto market grew from being a thing of the past that was only that was only known to a select group of computer geeks, to an extremely sought-after speculative investment which required additional trading tools and options. This is when contracts for difference or CFDs in short come in handy. CFDs have been a popular instrument to trade anything from soybeans to gold for many years, and currently it’s used extensively to speculate on price fluctuations.

Let’s have a look at what exactly is CFD and the ways it can be used to get exposure in the cryptocurrency market.

What exactly is CFD and how can it be used into cryptocurrency trading

Financial derivatives are that come by way of futures contracts signed between a trader or broker. They are settled with cash rather than through the exchange of physical items or assets.

In essence, CFD traders do not directly deal with the actual asset. Instead, they are entitled to an amount that is the sum of the present cost of the asset and its value in the future. If the traders are correct in their prediction of the future value of the asset, they get the difference. If not they are required to pay the cost of the loss by paying the differential to the brokerage. This method is suitable for any kind of asset, which includes cryptocurrencies.

How does it work

Let’s say that you’re certain that the cost of Bitcoin will increase significantly soon and you wish to make a profit from the price increase. You could purchase some coins from the cryptocurrency exchange, however the process is quite tiresome and can be a bit complicated, particularly if your investment time frame is only less than a few hours and you’re newbie to the world of digital currency. In this instance you could consider purchasing a contract for difference instead of buying real Bitcoin or an option called a futures contract which usually will require longer timeframes and more costs.

The majority of major trading companies have already reacted to the rising demand for crypto trading and have also added CFDs for diverse digital currencies to their portfolios of instruments that are tradable. That means you will not struggle to find an exchange that meets your trading conditions. For instance, you can make a deal for difference to eToro and any other company that trades at the current price, with settlement scheduled for the close of business.

If you are right regarding the price fluctuations and Bitcoin increases in value during the time frame of the CFD the broker will pay an amount of the increase. However when your prediction is wrong and you lose money, you must pay the difference in price for the loss to your broker. In essence, you bet whether the value of the currency will decrease or rise in a specified period of time. Since neither you nor your partner must own real Bitcoins to be able to make that wager Contracts for Difference offer investors a simple and easy option to earn profits from changes in the market for cryptocurrency.

The advantages that cryptocurrency has over CFD trading

Many traders are looking for the exposure of cryptocurrencies through reputable brokers using CFDs since this kind of investment choice has numerous advantages over direct buying and selling cryptocurrency.

Easy to start

Trading in cryptocurrency is typically linked to technical problems. For those who aren’t tech-savvy, they are often frightened by processes for opening a wallet as well as the verification process for an exchange for cryptocurrency, and other cryptocurrency-related nuances. They usually rely on trusted brokerages with extensive experience with customer service as well as simple account setups and features that allow trading with one click. In addition the traders who are involved in CFD trading of other products are more likely to make use of the instrument to include cryptos in their range of CFDs and profit from the fluctuation in their prices.

Leverage trading

The ability to leverage high is possibly the most popular reason to trade cryptocurrencies using CFD. CFD allows trading with more capital than the trader is able to. That means with 5:1 leverage, you’ll need just $500 to open an account that is worth $2,500 and you can make a significant profit , even with tiny price fluctuations. Because the rules governing digital assets don’t bind brokers, they have the freedom to choose the amount of leverage they will provide. The reason for this is that the margins of CFDs generally are higher than those of futures contracts, or the underlying asset. However, leverage will increase the chances of earning as well as potential losses, which is why one must be cautious when trading CFDs to trade cryptos using leverage.

Leverage is provided by the majority of cryptocurrency brokers. However, most cryptocurrency exchanges , aside the likes of Bitmex, Kraken, and Poloniex are not able to support this type of option.

Innovative technological instruments

When trading CFDs for cryptos through an established broker, you can choose from an array of options for tools for risk management and technology that include stop loss and take profit instruments. Given the notoriously extreme volatility in the market for cryptocurrency, these tools could prove useful and help you avoid devastating losses. Additionally advanced tools for charting and the analytical assistance offered by brokers can help you make better investments and enhance the overall performance of your business.

Rapidity of trading

For CFD it is not possible to purchase and sell any digital asset. the transactions are completed within a matter of seconds through the trading platform of the broker. It allows you to be flexible and lets you react swiftly to market changes. While, cryptocurrency transactions on blockchain could take hours, even days dependent on the cryptocurrency and the network’s capacity meaning that traders will not be able benefit from the rapid changes in market prices.

Customer support

Support from customer service is helpful in situations where you require assistance with how to open an account, or trade, or if you are facing technical problems. Although all CFD brokers offer support through different channels, including phone, email or live chat However, the majority of exchanges will keep the customers in line for long periods or allow them to solve issues on their own.

Better regulation

The majority of CFD brokers are licensed through CySec, FCA, or another reputable financial watchdog. The result is that clients of a trading firm are protected from bad practices, fraud and even theft. In addition, in the event of bankruptcy or other situations, traders are able to request compensation and get all or part of their cash returned.

The disadvantages from cryptocurrency CFD trading

In spite of its advantages and added value, CFDs for cryptocurrencies has certain drawbacks and risks to be aware of before investing your money into it.

Considerations regarding price

CFD crypto trading is accompanied by an amount that is a form of spread which is the difference between the purchasing price and the selling. The spread is payable in full regardless of the outcome of the transaction, which is why you’ll first experience losses the moment you begin an CFD position. CFD position. The more riskier and less liquid an asset you choose to trade and the more spread you are charged.

In addition there are other factors to consider. All CFD brokers charge fees to hold the CFD position between one day and the following day. They are calculated based on a percentage of the LIBOR rate and can be quite excessive in the case of Bitcoin and other cryptocurrencies due their volatility. This means that the expected price fluctuation will be greater than that which cover the commissions for trading and generate profit.

The importance of trust

The trading of cryptocurrencies through an CFD broker is built on a substantial level of confidence. It is essential to ensure that the prices you see on the platform of your broker are consistent with market trends and come through an exchange. Unfair brokers could manipulate the price of cryptocurrency which can cause unnecessary losses on the accounts of clients. Additionally certain CFD brokerages have stopped cryptocurrency trading, making them less trustworthy for continuous service.

Black Swans and Brokers

In December 2017 , some CFD brokers began to limit their exposure to cryptocurrency due to the high risk of Black Swan events and the tiny hedge opportunities through CBOE or CME futures.

The market was able to earn quite quick bucks , leaving brokers in the red which forced them to cease their cryptocurrency offering or restrict exposure stopping opening new positions.

Thin portfolio

This is likely to be one of the main negatives to trading cryptocurrency using CFD brokers. Their list of available coins to trade is significantly smaller than that of other cryptocurrency exchanges. This means that traders need to restrict their strategies to a few dozen popular coins and are not able to profit from price fluctuations of the hottest newcomers or other less liquid assets.
Picking a broker for cryptocurrency CFD trading

The trading options are becoming popular for market participants, with a variety of old and brand new brokers appearing to provide CFD trading options to their clients and satisfy the increasing demand.

When selecting a broker it is essential to know it is that CFD trades are based upon a contract type of relationship between the company trading and its customer instead of a buy-and-sell kind of transaction. This means that your gain or loss is determined by the price you pay at the beginning and close of the transaction. Make sure your broker has trustworthy data for trading and doesn’t alter prices. If they don’t, you won’t be able to profit from the price changes of cryptocurrency regardless of how reliable and accurate predictions you have. It’s a tough problem because there isn’t a reliable source of cryptocurrency quotes as prices at various exchanges could be drastically different.

Featured News