Since 2017, Bitcoin has gained immense popularity. From a market cap of about $20 billion, the crypto has risen to reach an all-time high of $320 billion before reluctantly dropping to $118 billion on August 29th, 2018. Many traders and investors have entered the cryptocurrency market with the aim of making a profit. As a trader, you can choose to use a cryptocurrency exchange or a CFD broker. Let us look at what difference these two trading methods have;
Cryptocurrency exchange trading
A cryptocurrency exchange can be defined as a marketplace where traders can sell and buy cryptos such as Bitcoin in exchange for other cryptos or fiat currency. Admittedly, most of the traders use cryptocurrency exchanges when they want to trade their Bitcoins. A crypto exchange acts as an intermediary between the seller and the buyer of crypto coins or tokens.
Just like it is the case with a stock exchange, a trader can opt to buy or sell their Bitcoins either through a market order or a limit order. When a trader inputs a limit order, the trader is instructing the exchange to trade their BTC at a price above the bid price or a price lower than the current ask price depending on whether the trader is selling or buying. When a trader selects a market order, s/he is directing the exchange to trade his or her coins for the best price in the marketplace.
In order to participate in an exchange, a trader must first register. It is important to know that all cryptocurrency exchanges charge a transaction fee for every sell or buy order completed on the exchange. In some exchanges like Paxful, only the sellers get charged a 1% fee on the volume of crypto sold. Another applicable charge is the conversion of currency fee.
The Bitcoin CFD trading
The other popular way that a trader can participate in Bitcoin trading is through CFD trading. Let us first look at what is a CFD. This can be defined as a financial derivative which is carried out as a contract between a trader and a brokerage firm. In this contract, the trader does not actually own an underlying asset but rather possess a right to receive the difference between the current value of the asset and its value in the future. If the prediction the trader made about the asset is right, they get paid the difference. However, if they are wrong in their prediction, they lose money.
CFD trading mostly involves a trader using leverage. This means that if your investment is $100 and you opt to go with 3:1 leverage, then you are actually trading using $300. A basic example; Let’s assume your account has a total balance of $1,000 and you are right in this one trade. The Bitcoin broker will add $300 to your account. But if you are wrong, you will lose $300.
The difference between Bitcoin CFD trading and exchange trading
CFD trading is mostly designed for the day traders. If you opt to let your trade stay overnight, you will pay a swap fee. CFD trading is mainly for the short-term while exchange trading is preferred for the long-term trading. Between the two, none is the better. The difference is on which is your preferred style of trading.