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Can You Trade Cryptocurrencies Using a Forex or CFD Platform?

Let’s take a look at how one can trade cryptocurrencies using a forex or a CFD trading platform. You will learn about the pros and cons and a few things that make cryptocurrency CFD trading different to others.

Cryptocurrencies can be traded using a forex or CFD platform these days. This is besides the regular or conventional ways of buying and selling cryptos through an exchange.

However, there are quite some subtle differences if you choose to trade cryptocurrencies using a forex or CFD platform. Depending on your needs, you may want to reconsider whether you want to trade cryptos through a CFD forex trading platform.

As the name of the instrument suggests, cryptocurrency CFD trading is a derivative trading product. This means that when you trade cryptos using a forex or CFD platform, you are able to speculate on the prices.

Beyond this, cryptocurrency CFD trading does not do much. As a day trader or a speculator, if the volatility in the cryptocurrency markets attracts you, then CFD trading is the best choice.

But there are also traders who prefer to invest in cryptocurrencies. This means, buying and holding the cryptos. This is how most of the early entrants into the world of cryptocurrency trading got started.

The main purpose of buying and holding a cryptocurrency is to ride its long term appreciation. It is similar to investing in stocks, where you would buy and hold the currency over a prolonged period of time.

The holding period for such an investment strategy can range from a few months to even a few years. But each of these types have their own pros and cons.

Let’s take a look at how one can trade cryptocurrencies using a forex or a CFD trading platform. You will learn about the pros and cons and a few things that make cryptocurrency CFD trading different to others.

How can you trade cryptocurrencies using a forex or a CFD platform?

Cryptocurrency CFDs or contracts for difference are no different to any other type of CFD contracts. The most commonly traded CFDs include forex, commodities and stocks.

Through a CFD contract, the trader can buy and sell or go long or short in the market. CFDs are leveraged. This means that traders only need to have a certain minimum upfront as capital. The rest of the funds are borrowed from the forex broker.

This is the reason why that you will often hear about forex CFD brokers offering leverage of 1:100. In this leverage, the day trader is able to control up to 100 units of the instrument they want to trade.

In terms of pricing, a day trader would not see much difference to trading the underlying asset directly. After all, a CFD contract derives its prices from the underlying asset directly.

Thus, a cryptocurrency CFD such as Ethereum, gets its pricing from ETH.

The biggest difference is that with CFD trading, you can speculate on which way the market is moving. Thus, combined with the lower capital requirements, cryptocurrency CFD trading is getting popular.

Day traders can hold on to their positions for just a few minutes, to a few hours through CFD trading. You can also make use of technical analysis and other charting capabilities when trading using a forex CFD platform.

There are no complicated procedures involved and one can simply hit the buy and sell button to trade cryptocurrencies on the CFD trading platform.

Advantages of trading cryptocurrencies using a forex CFD platform

Trading cryptocurrencies through a forex CFD platform has its own advantages. This is something that some traders may want, but others may shun.

The pros and cons of trading cryptocurrencies on forex CFD platform are not really the pros and cons.

These are some of the important distinctions between investing in cryptos and trading them. Depending on one’s needs, either investing or trading may be the better of the two options.

The main goal of pointing out these differences is for the reader to understand whether they should be trading cryptos via CFD or invest in them.

There are no wallets required

One of the main gripes of trading cryptocurrencies is the complicated processes involved. One has to be technically savvy to understand how the blockchain works. This makes investing in cryptocurrency out of reach for many.

An investor would spend some time creating their wallet, saving their digital wallet information, including recovery phrases and keys. If you happen to lose your wallet information, then your cryptocurrency is locked out for good.

With cryptocurrency CFD trading, there is no such requirement. You can just start trading on the CFD’s just as you would trade a forex currency pair.

Speculating on prices is easier through cryptocurrency CFD

Cryptocurrency CFD trading makes it easier to speculate on the price movements. Since there are no wallets to own, the day trader can go long or short.

This means that if a trader spots an opportunity, they can immediately start trading. This is one of the biggest advantages of trading cryptocurrency CFDs.

And in many cases, since the crypto trading instruments are already integrated into the MT4 trading platform it makes things very simple.

Day traders are known to use various technical analysis indicators in the cryptocurrency markets. These include moving averages, Bollinger bands, etc. on cryptocurrency CFDs.

Shorting cryptocurrency CFDs is easier

If you are an investor in cryptocurrencies, then the only way you can go short is via selling your holdings.

This would mean having to buy back the cryptocurrency when prices rise again. But this process of selling and buying back the cryptocurrencies can be expensive. This is attributed to the network fee or the gas fee, which can be quite high most of the times.

Therefore, during peak market activity hours, an investor will end up losing money if they sell their cryptocurrencies.

Through CFDs however, the day trader can go short even if they do not own any of the underlying assets. Because these are cryptocurrency CFD instruments, one can easily short the instrument. There is no actual selling of the underlying asset.

Thus, when there is a trading opportunity to be made when the prices are down, cryptocurrency CFDs allow you to make money by taking a short position in the market.

You don’t have to convert fiat money to crypto

In cryptocurrency CFD trading, there is no conversion happening.

You are merely opening a position that is equivalent to the prevailing exchange rate of the cryptocurrency. Therefore, whether you make a profit or a loss, the amounts are exchanged back to the dollar value.

If you hold your CFD trading account in another currency, such as the EUR or AUD, then this is also made possible. But beyond this, traders do not have to worry about the conversions, especially given how volatile the crypto markets can get.

There are low transaction fees

Because cryptocurrency CFDs are derivatives, you won’t be participating in the blockchain. Therefore, there are no huge fees to pay for conversion. You are merely speculating on the direction of prices. This cuts down your costs of trading cryptos quite a lot.

On the other hand, there is a mark up that you will pay. These are merely a few extra ticks added on top of the market price. This mark up is the fee that your forex CFD broker will charge you for trading cryptos.

Technical analysis and automated trading is easy with cryptocurrency CFDs

Since your forex CFD broker allows access to cryptocurrency instruments, you can use the same trading platform.

This gives you access to use automated trading strategies as well. For the most part, your forex CFD broker will offer you trading on the MT4 trading platform. As you may know, this trading platform allows you to manually trade as well as automate your strategies.

Therefore, cryptocurrency CFD trading is simpler due to the choice of indicators and various automated bots that you can use for trading.

Demo trading on cryptocurrencies is possible!

We all know that cryptocurrencies are volatile.

Hence, without good practice in this market, trading them directly using your real money can lead to losses. This is one of the biggest advantages of trading cryptocurrencies through CFDs.

You can open a demo account on the MT4 trading platform through your forex CFD broker. Then, you can practice trading cryptocurrency CFDs on this account. This ensures that you do not lose any money.

At the same time, you are able to gain practice and familiarity in how the crypto markets work. This can be to your benefit especially if you want to focus trading on just cryptos.

If you were to invest in the crypto markets directly, then there is no option for demo trading. You will have to simply buy and hold your cryptos in hope that it will appreciate in value.

Disadvantages of trading cryptocurrencies using a forex CFD platform

The biggest disadvantage of trading cryptos via an online CFD trading platform is obvious. You don’t own any underlying cryptos in question. This means that if you want to pay for services or goods using the digital currency, you would not be able to do it.

But when it comes to investing, every trader’s requirement and risk profile differs. So, in many cases, this disadvantage may turn out to be a blessing in disguise. After all, through cryptocurrency CFD trading you are still able to trade this market.

There are no wallets that you can hold on to

As outlined in the advantages section, with cryptocurrency CFD trading, you don’t have to bother about creating a wallet. A cryptocurrency wallet merely holds your digital tokens. You can use this wallet to sell or use it for paying for goods and services.

With cryptocurrency CFD trading, due to the nature of the instruments, wallets are out of question.

You cannot convert one cryptocurrency to another

Some holders of cryptocurrencies tend to exchange one token for another. The most common transaction is to convert Bitcoin (BTC) to Ethereum (ETH) or vice-versa.

This is possible if you hold the tokens in your wallet. But with cryptocurrency CFD trading, you are trading the derivative instrument. Therefore, at best you can directly trade BTCUSD or ETHUSD. Some forex brokers also allow you to trade on cross cryptocurrencies such as BTCETH.

If you truly want to convert one token to another, then cryptocurrency CFD trading isn’t the best choice.

The choice of cryptocurrencies may be limited

Not all cryptocurrencies are available as CFD instruments. This is because there needs to be a demand for those cryptos with your forex broker. So, if you look around you may see the number of cryptocurrencies a forex broker offers can differ.

Traders need to look into the choice of cryptocurrencies that their broker offers.

For example, some CFD forex brokers may offer trading on additional instruments like Ripple (XRP), or Litecoin (LTC), whereas others may not.

Hence, when it comes to the choice of cryptocurrencies in CFDs your options may be limited.

Is it better to trade cryptocurrencies using a forex CFD platform?

So far, we have seen the main differences between trading cryptocurrencies using a forex cfd platform and buying them directly.

Clearly, there are quite some broad differences. The reader should now be able to understand these differences and apply it to their personal requirements.

Are you a short term trader who prefers to speculate on the cryptocurrency volatility? In such cases, trading cryptos via CFD platform makes it easier. This also includes those who do not have the capital to buy the extremely high valuations in the crypto markets.

But on the other hand, if you are one of those who prefer to invest, then buying cryptos through a crypto exchange is a better option. This allows you to own the cryptocurrencies. But it comes at a cost of having to use no leverage.

You may also need to be a bit tech-savvy to ensure that your wallet is safe.

At the end, the decision on whether or not to trade cryptocurrency CFDs via a CFD trading platform depends on your investing needs. Both forms are risky and therefore, the reader should weigh the pros and cons before deciding on trading crypto currencies via a CFD trading platform.

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Disclaimer

The information provided is of a general nature and is not intended to be personalised financial advice. The information provided is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.

Trading in Rockfort Markets derivative products may not be suitable for everyone as derivative products may be considered as high risk. Please ensure that you understand the risks involved. A Product Disclosure Statement can be obtained here and should be considered before trading with us.

William B

October 8, 2021

  • Reading time: 7 mins
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