Cryptocurrencies are highly unpredictable, but can be extremely profitable for a trader. The main purpose for using a cryptocurrency is to allow people to buy, trade, and invest without the need for banks or other financial institutions. Today, the market for this alternative investment has grown rapidly and cryptocurrency has surged in terms of popularity.
Trading cryptocurrency can be accomplished with the help of two individual instruments: Traditional cryptocurrency exchange and cryptocurrency-based CFDs. Most people prefer trading through cryptocurrency exchanges, but CFDs are currently rising as the second most popular options for trading cryptocurrencies. Both these methods of trading offer flexible positions though they should be used in a different way depending on the market scenario and the preferred trading style.
Opting for the traditional exchange trading will allow you to buy the underlying asset, which will make you the direct owner of the commodity. Subsequent to the purchase, the cryptocurrency is sent to your wallet created within the exchange. After that, you can transfer it to any address, account or wallet using your individual private key.
Trading with the cryptocurrency exchanges will give you flexible options regarding the transfer, sell, exchange or conversion of the cryptocurrency. Thus, it lets you physically control the digital asset and store it securely with the use of a private key or wallet. If the key is held in an offline storage, there is no risk of a third-party counter. It also allows the use of multiple wallet options to store or transfer the assets.
The private key is exclusive to each address and must be protected. The loss of it may equate to the loss of the asset as it is unrecoverable. If the key is stored at the exchange, there is a risk of it being hacked or stolen. The bottom line is that for long-term investors who are intending to safeguard their assets, the cryptocurrency exchange is the way to go.
But, if you are looking to venture on the value of the cryptocurrency over a short period of time, CFD is for you. Contrary to the prior method, CFDs do not involve the physical purchase of the cryptocurrency. Instead, the trader buys a right to claim the difference between the current and the future prices.
Trading in cryptocurrency CFDs removes the obligation to safeguard any private keys. Moreover, an additional leverage is usually offered on CFDs and thus your margins can have more buying power. It allows the use of ‘stop loss and take profit’ methods for those looking to gamble on a decline in the prices. On the flip side, the trading costs are usually wider than in exchange trading. Trades may get canceled or reversed if the broker finds a liability in the system. Besides, margin trading increases the risk of losses.
Conclusively, both the instruments can provide remarkable results if used correctly. However, each of them is best suited to a particular market scenario and should be used in accordance with the long-term or short-term strategies.
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