CFD VS SPOT: WHERE IS THE RETAIL CRYPTOCURRENCY MARKET GOING?
Aaron Miller
Table of Contents
Many traders are asking the same question on a variety of instruments: CFD or Spot? In some cases, like Gold and other commodities, the CFD market has eclipsed the exchange market. This makes sense – the original commodities were ordered for later delivery dates, making the contract price speculative at the time the agreement was made. Thus organically, in the cases of natural gas, agriculture, precious metals and the like CFD’s were more representative of the market’s needs. Throw in the shares that trade around commodities and there was limited need for a spot price.
And then there is Forex. Currencies gravitated towards spot trading over options trading – the closest thing to CFD’s in currencies. Like commodities, this decision by traders generally mimics the way that currencies are transacted, in immediate handover of money for goods or services. While options trading is generally also a strong market, since its actual utility lies in the long termbyminimizing currency risk or as a hedge by businesses with foreign currency, its trading tends to reflect long term expectations.
So what of the new cryptocurrency CFD’s? Are traders likely to flock to this? Using the above logic, it is likely that spot will be the predominant method of trading cryptocurrencies. Since cryptocurrencies are generally used as instantaneous transactions, even more so than international currency transfers, then logically this is how it should be traded.
However, there are a few other factors to consider prior to accepting this logic. Firstly, this presupposes that cryptocurrencies are used for transaction purposes. It is clear that cryptocurrencies have substantial hedge potential in the same way that options do. As neither are linked to a central bank, it might even provide a better hedge. Already this capability is being shown as a legitimate end use scenario, raising the possibility that this outcome may become a primary use for cryptocurrencies.
The second situation is the unique conditions that caused the rise of CFD’s. Because of the current small market and wide volatility when trading cryptocurrencies, CFD’s were introduced to service the need for a secondary market activity, allowing banks and other institutions to get involved in growing market volumes and thus creating less volatility. Should this be the case, CFD’s would provide a strong stabilization on the exchange activity and also help to establish longer term trading.
The current reality of the exchange versus CFD debate is that both currently offer good solutions for traders. For those that want the volatility and profit potential of spot, this will be the preferred method. To date the interest in cryptocurrencies has been driven by this volatility, and this is not likely to change in the medium term. But CFD’s are also providing something that traders who currently avoid cryptocurrencies are seeking: more control, regulation and legitimacy. These two trader types are not the same people, nor are they likely to switch camps, meaning that each will likely continue to grow in line with growing interest.
In that case, it is likely that cryptocurrencies will go the way of currencies, with a larger focus on spot, but a strong CFD/options presence.
As it currently stands, there is no practical difference between trading CFD or spot. Either will provide you with the opportunity to profit in the same way. Perhaps while the CFD market matures, volumes will be better with spot, but once the CFD trading volumes are strong, the decision should be more based on trading methodology and preference, than where the future of an instrument is likely to go.
Aaron Miller is a professional writer who specializes in finance and technology, and likes to write about the cross section between them. He currently runs the blog section at Leverate.com.
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Many traders are asking the same question on a variety of instruments: CFD or Spot? In some cases, like Gold and other commodities, the CFD market has eclipsed the exchange market. This makes sense – the original commodities were ordered for later delivery dates, making the contract price speculative at the time the agreement was made. Thus organically, in the cases of natural gas, agriculture, precious metals and the like CFD’s were more representative of the market’s needs. Throw in the shares that trade around commodities and there was limited need for a spot price.
And then there is Forex. Currencies gravitated towards spot trading over options trading – the closest thing to CFD’s in currencies. Like commodities, this decision by traders generally mimics the way that currencies are transacted, in immediate handover of money for goods or services. While options trading is generally also a strong market, since its actual utility lies in the long termbyminimizing currency risk or as a hedge by businesses with foreign currency, its trading tends to reflect long term expectations.
So what of the new cryptocurrency CFD’s? Are traders likely to flock to this? Using the above logic, it is likely that spot will be the predominant method of trading cryptocurrencies. Since cryptocurrencies are generally used as instantaneous transactions, even more so than international currency transfers, then logically this is how it should be traded.
However, there are a few other factors to consider prior to accepting this logic. Firstly, this presupposes that cryptocurrencies are used for transaction purposes. It is clear that cryptocurrencies have substantial hedge potential in the same way that options do. As neither are linked to a central bank, it might even provide a better hedge. Already this capability is being shown as a legitimate end use scenario, raising the possibility that this outcome may become a primary use for cryptocurrencies.
The second situation is the unique conditions that caused the rise of CFD’s. Because of the current small market and wide volatility when trading cryptocurrencies, CFD’s were introduced to service the need for a secondary market activity, allowing banks and other institutions to get involved in growing market volumes and thus creating less volatility. Should this be the case, CFD’s would provide a strong stabilization on the exchange activity and also help to establish longer term trading.
The current reality of the exchange versus CFD debate is that both currently offer good solutions for traders. For those that want the volatility and profit potential of spot, this will be the preferred method. To date the interest in cryptocurrencies has been driven by this volatility, and this is not likely to change in the medium term. But CFD’s are also providing something that traders who currently avoid cryptocurrencies are seeking: more control, regulation and legitimacy. These two trader types are not the same people, nor are they likely to switch camps, meaning that each will likely continue to grow in line with growing interest.
In that case, it is likely that cryptocurrencies will go the way of currencies, with a larger focus on spot, but a strong CFD/options presence.
As it currently stands, there is no practical difference between trading CFD or spot. Either will provide you with the opportunity to profit in the same way. Perhaps while the CFD market matures, volumes will be better with spot, but once the CFD trading volumes are strong, the decision should be more based on trading methodology and preference, than where the future of an instrument is likely to go.
