Crypto Exchange Trading vs Trading Cryptos on FX Platforms: Similarities and Differences
There are basically two ways that cryptocurrencies can be traded: it is either they are traded on exchanges or they are traded on FX platforms as Contracts for Difference assets (CFDs). For the benefit of those who are beginners and who cannot distinguish one from the other, this article will highlight the similarities and differences between the two.
Similarities Between Crypto Exchange Trading and Cryptocurrency CFD Trading
There are ways in which both styles of cryptocurrency trading are similar. For those traders who have accounts on crypto CFD platforms as well as crypto exchanges, an understanding of these similarities will make it easier to easily adapt strategies and methods between both trading venues.
a) Order Types
The same types of orders used in trading cryptocurrencies as CFDs are also used when trading cryptos on an exchange. You can use market orders (Buy or Sell) to execute trades at the prevailing market prices, or you can use limit or stop orders to get trades executed at different prices that could either be cheaper or more expensive for the trader respectively.
b) Transactional Currencies
When it comes to whether deposits and withdrawals can be made with the same transactional currencies in both trading arenas, are there similarities? The answer is yes, as there are cryptocurrency exchanges that accept fiat and crypto deposits (e.g. Coinbase), and there are also brokerages that accept the regular fiat deposits as well as cryptocurrency deposits.
c) Response to the News
Cryptocurrencies as well as their CFD counterparts will respond to the news in the same way. If a news release boosts the price of Bitcoin on an exchange, the same response will be seen in the Bitcoin CFD asset.
d) Chart Packages and Tools
You are likely to see a cryptocurrency exchange and a crypto CFD provider offering the same chart types (line, bar and candlesticks), chart tools and indicators on their trading venues. For those who prefer to use technical analysis to analyze their trades, this is a welcome development, especially if they have accounts on both sides of the crypto trading divide.
Differences Between Crypto Exchange Trading and Cryptocurrency CFD Trading
Here are differences between the trading of cryptocurrencies on exchanges and trading of crypto CFDs on platforms.
a) Traded Assets
One key difference lies in what is traded. In crypto exchange trading, the traded assets are the actual cryptocurrencies themselves. When you perform a trade on a crypto exchange, you are buying or selling the actual cryptocurrency in exchange for yet another crypto. In crypto CFD trading, the actual cryptocurrencies do not change hands. What is traded is the contract and not the crypto itself.
b) Regulation of Trading Venue
Majority of cryptocurrency CFD trading is done from FX platforms, which to a large extent are regulated trading venues. The FX market is one of the most regulated markets in the world, and brokers that offer cryptocurrency CFDs usually have to authorized and operate with licenses from central regulatory authorities.
In contrast, cryptocurrency exchanges are to a large extent, mostly unregulated. This tends to add to the risk profile of cryptocurrency exchange trading.
c) Need for a Digital Wallet
The point of difference mentioned above also brings out other differences. If no cryptos exchange hands in crypto CFD trading, then there is no need to own a wallet. However, a situation where cryptos have to change hands means that wallets are required with exchange trading, as it is those wallets that are used to hold crypto coins that are bought and sold.
d) Leverage & Margin Requirements
Cryptocurrency exchange trading is basically unleveraged. The trader is required to come up with all the capital required for executing every trade on a cryptocurrency exchange. In contrasts, cryptocurrency CFD trading is leveraged, and the trader only needs to come up with anything between 10% and 50% of the capital required for each trade.
e) Possibility of Value Erosion
Cryptocurrencies have a possibility of value erosion, but until the cryptocurrencies in question are sold, this is not actualized. In contrast, cryptocurrency CFDs have a possibility of value erosion that can be actualized even if the trader does not unwind the position. This is what makes cryptocurrency CFD trading particularly risky.
f) Swap Charges
Cryptocurrency CFD positions that are held overnight will attract swap charges. However, cryptocurrencies traded on exchanges do not incur such charges, as there are really no active trade positions once an exchange of cryptos has occurred.
g) Vulnerability of Asset Holdings
In cryptocurrency CFD trading, no assets are owned in all transactions. Therefore, vulnerability of crypto holdings to theft or hack attacks is not an issue here. However, crypto exchange trading is faced with the issue of vulnerability of holdings to hackers and theft, as a result of physical crypto assets being held in wallets.
h) USD Pairings on Assets
Most cryptocurrency exchanges offer crypto-crypto assets, and those that offer crypto pairings against the USD are very few indeed. In contrast, crypto CFD asset pairings commonly feature the US Dollar and rarely feature crypto-crypto asset pairings. So if you love to trade BTC/USD or ETH/USD, you are more likely to find this pairing as a crypto CFD asset than on a crypto exchange.
Conclusion
Understanding how cryptocurrencies are traded on an exchange or are traded on an FX platform as CFDs will go a long way to enable traders know where they should be operating from. Cryptocurrency exchange trading has its unique features, and presents a risk element that is distinctly different from cryptocurrency CFD trading. Knowing where these two crypto trading styles are similar or differ is a good introduction for those who want to participate in cryptocurrency trading.