Cryptocurrencies are in the middle of yet another boom in 2019, as Bitcoin is starting to inch its way towards its all-time high of $19,000 in 2017.
Because of the sudden jump in price levels, many traders have started opting for margin trading options in order to apply leverage to their trades and try to get as much out of it as possible.
Although using leverage is completely safe, it needs to be mentioned where exactly it is safe. With most crypto exchanges, they offer a leverage of only 1:2 in order to maintain the risk of their traders, while other companies, such as CFD brokerages sometimes give as much as 1:100.
No matter how enticing this may sound, traders – especially inexperienced traders – are often better off if they avoid trading cryptocurrencies on CFDs and go for the real coins instead.
Three Reasons Why Crypto Traders Should Avoid CFDs
Leverage is the most enticing feature of a CFD brokerage. The more they offer the more a person can make if they make a smart guess.
For example, if the leverage is 1:100 and you place a $100 trade, that means you’re trading with $10,000 instead and are entitled to the majority of profits.
Although leverage is a very handy tool during a market uptrend, it could be disastrous should a quick price fall strike, and that is nothing new for the crypto market.
For example, a leveraged trade has the potential of wiping out the account completely, while a normal crypto trade will only lose the trader as much as the coin itself sheds in price.
Leverage is only relevant in slightly less volatile markets like Forex or Stocks. With cryptocurrencies, they can be devastating.
Although crypto exchanges are also notorious for their sometimes overwhelming fees on transactions and deposits, it needs to be mentioned that they’re not even close to the number of fees CFD brokerages have.
The most inconvenient one is the overnight fee. Meaning that if you leave your position open for more than 24 hours, you will have to pay a fee.
In most cases, it’s around one or two percent, but considering how everybody is trying to hold onto their coins for the long run these days, it would be a massive drain on the wallet.
Even if the coin you’re holding the position open for grows by 10% in a week, that profit you were supposed to make would go entirely to paying fees.
According to the CFD explanation found on InsideTrade, CFD stands for Contracts for Difference – they’re basically digital contracts that specify your purchase for a said price of said asset.
This means that you don’t actually own the asset, you’re just speculating on the price with a digital certificate.
Although this is sometimes seen as an advantage, as the liquidity of cryptos is much higher with CFDs rather than in their natural form, it also comes at great risk.
Despite that advantage, the lack of ownership places a massive gap between the CFD trader and the blockchain world.
Furthermore, most CFD brokerages only feature four or five coins at most, as listing smaller ones is often unprofitable.
Should a trader want to diversify into other cryptocurrencies, their options will likely be limited.
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