Similar to the day trading concept derived from the traditional financial markets, cryptocurrency CFDs have gleaned from the traditional methods of trading CFDs or Contracts for differences between traders and stock brokers.
What Is Cryptocurrency CFDs?
In the earlier times, Contracts for difference (CFD) is an agreement between the broker and the trader in which the trader speculates the prices of certain assets like stocks, commodities, and currencies instead of directly buying them.
Moreover, if the position closes in profit, the broker has to pay the difference to the trader, and if the position closes in a loss, then the trader has to pay the broker.
However, trading cryptocurrency CFDs simply means speculating on the price of a cryptocurrency or a digital asset. CFDs are a type of derivative like ETF (Exchange-traded funds) with some crucial differences.
To put it in simple words, Contracts for differences (CFDs) in cryptocurrencies is a method or a process through which trader decides whether the cryptocurrency price is going to increase or decrease in the future. In crypto CFD trading, you as a trader or investor never own the asset. Rather, you predict the rise or fall in its future value.
For every point of the currency that moves in your nominated position, you will be rewarded with multiples of the currency units you bought or sold. Additionally, if the price of the currency moves in the opposite direction, then you will end up in losses.
How Do Trading Cryptocurrency CFDs Work?
With CFDs, now investors can earn huge profits without owning the underlying assets. Usually, prominent cryptocurrencies like Bitcoin (BTC) are traded as pairs with regular currencies or fiat currencies. In other words, cryptocurrencies allow investors and traders to speculate on the value of a cryptocurrency pair.
Let’s list some of the most popular cryptocurrency CFDs to trade:
- BTC/USD
- BCH/USD
- LTC/USD
- ADA/USD
- ETH/USD
- DOT/USD
- DOG/USD
- XRP/USD
- LNK/USD
- XLM/USD
- EOS/USD
- BTC/ETH
An investor or a trader can ‘go long’ or ‘go short’ (short selling) depending on the price analysis of a particular currency. Investors can ‘go long’ if they think that the price of cryptocurrency will rise in the future. Similarly, they can ‘go short’ (short selling) if they think that the price is going to decrease.
To become a professional cryptocurrency CFD trader, you must understand and grasp the concept of ‘leverage.’ It is a key advantage as well as a disadvantage in trading cryptocurrency CFDs.
To commence CFD trading, you as an investor need to deposit a small percentage of the trade’s total value. The small percentage that you have to deposit is known as the margin requirement, and it can be 10%, 20%, 5%, or even less than the total trade value.
Suppose you are commencing a trade worth US$ 10,000, then you have to deposit the margin requirement of US$500. Moreover, if the price of the currency moves in your speculated direction, you will receive an amount that is much more than the deposited margin.
Trading on margin will magnify your returns exponentially from a relatively minimal initial amount. However, it also means that if the price moves in the opposite direction, then your losses will be magnified as well, and you will end up paying much more than the minimum initial amount.
CFD trading by depositing a margin requirement is one of the most cost-effective and accessible investment methods. However, it involves an extra layer of risk. Hence, it becomes crucial even for a professional trader to devise a proper risk management strategy before commencing CFD trading.
Two Top-Notch Strategies To Trade Cryptocurrency CFDs:
Apart from the margin trading, there are other two top-notch strategies used by investors and traders while trading CFDs in cryptocurrencies:
Breakout Strategy
The breakout strategy is a pivotal strategy in technical terms. In other words, it’s nothing but looking out for a price to break specific support and resistance levels. During the trade, many a time, it happens that the price is unable to move up or down and goes into a consolidation spot.
For the breakout strategy to work properly, traders use multi-time frames and price action. For an investor to know whether the market is moving in a bullish or bearish manner, they need to pull up a 4-hour time frame chart to check the price range. Once an investor finds out the market direction, he can pull up the 1-hour chart to analyze price patterns.
Golden Cross Strategy
A well-known crypto expert or an experienced cryptocurrency trader will know about the importance of the Golden cross strategy in trading. The Death cross or Golden cross is a trading technique that uses two moving averages. To explain in brief, a moving average is a technical analysis tool that uses two or more data points to calculate the average of the closing price.
Benefits Of Trading Cryptocurrency CFDs
CFDs have long been used in financial products like stocks, commodities, currencies, and the forex market. However, CFD trading in the world of cryptocurrency is a new addition.
The foremost advantage of trading CFDs in the crypto world is that you don’t have to buy or sell the currency. In fact, crypto CFD trading completely eliminates the process of owning the underlying asset.
Before we move ahead and learn more about CFDs in the crypto world, let’s note down some of the major benefits of trading cryptocurrency CFDs:
- Apart from the risk of losing money, trading on margins allows investors to magnify their gains and earn much more than the minimum initial amount.
- CFD trading is much more intimidating as you can trade cryptocurrencies without actually owning any crypto. It entirely eliminates the process of straight-up buying and selling crypto.
- Being an investor, you need not open a cryptocurrency storage wallet or deal with any exchange.
- You can start trading easily by using fiat currencies like BTC/USD, BCH/USD, ETH/USD, and so on.
- CFD trading platforms bestow much better customer support in case of serious issues, unlike traditional cryptocurrency exchanges. Such as axi.com, a cryptocurrency CFDs trading platform, which is up and running 24*7.
- Depending on the investor’s speculation, they can benefit from rising or falling markets.
- Access to an expanding range of prominent cryptocurrencies, according to the list mentioned above in this article.
- As trading on margins increases the probability of losing money rapidly due to incorrect speculation and Leverage, stop-loss and take profit-trading tools can help reduce risks.
- However, the uncertainty and extreme volatility depicted by cryptocurrencies can act as a major advantage for traders and investors because of plenty of opportunities to make a profit.
- Unlike trading CFDs in stock markets with limited time, in the world of cryptocurrency, trading CFDs in cryptos can happen at any time of the day without any time limit.
Disadvantages Of Trading CFDs In Cryptocurrencies:
Extremely risky
Utilizing the strategy of leverage and margin requirement, especially in an asset like cryptocurrency, which is extremely volatile, increases the probability of losing a hefty sum of money, much more than the minimum initial amount.
Losses are magnified as exponentially as profits, and that is the key reason why many government regulators in different countries have restricted the maximum Leverage on a CFD trade. The problem is extremely serious, and some countries like the United Kingdom have banned the CFD financial instrument.
Little variety
If you as an investor want to trade in a variety of cryptocurrencies, then Contracts for difference or CFD might sound unattractive to you because, as of now, there is a limited choice of coins to trade cryptocurrency CFDs, mostly limited to the prominent cryptos like Bitcoin, Ethereum, and Litecoin.
Involves high costs
Trading CFDs in cryptocurrencies involves high costs while opening a position, closing a position, and extending the deadline. A deadline is a point at which your position in the trade will close automatically if you haven’t closed it. This can happen any time, even if you are in a positive or a negative position.
However, you can pay a significant amount of fee to extend or postpone the deadline and wait for the right time to close the trade. This will increase your expense as you will keep on waiting for the right time to close the trade by paying a hefty sum of money to postpone the deadline further.
Why Trading Cryptocurrency CFDs Is Better Than Trading Cryptocurrencies?
Buying cryptocurrency on a cryptocurrency exchange is a long and tedious process even for professional investors and further becomes tough for beginners. On a cryptocurrency exchange, you have to open an account, open a cryptocurrency wallet, and secure the 12-word seed phrase to recover your wallet in case you forget the password.
Moreover, after buying cryptocurrency you have to wait for a long time to make a profit.
However, this isn’t the case with Contracts for differences. Though trading CFDs in cryptocurrency is a risky bet, trades and swings in value happen quickly. This allows for instant profits if the currency moves in your speculated direction.
Moreover, trading cryptocurrency CFDs or Contracts for the difference is a worthy bet for advanced traders having years of experience in the cryptocurrency market. One major reason why CFDs are worth considering for advanced traders is that they are keen to opt for short-term positions.
Advanced traders have lower spreads which can be capitalized on smaller price movements, and they possess a probability of making profits whether the market is going up or down.
Bottom Line
Trading Contracts for differences in the world of cryptocurrency requires skill and an extreme level of tolerance and patience. It’s a game of trial and error. Additionally, there are a lot of risks involved in the process of trading CFDs, but if you do it properly, with patience, trading CFDs in cryptocurrencies can bring in a lot of income.
