In the beginning of blockchain digital currency, virtual coins were traded via special cryptocurrency exchanges, or through the OTC market which was where the seller and buyer agreed to buy and sell coins between them.
But, as time went on the crypto market grew from being a thing of the past that was only that was only known to a select group of computer geeks, to an extremely sought-after speculative investment which required more tools for trading and options. This is when contracts for difference – also known as CFDs in short come in handy. They have been a preferred instrument to trade anything from soybeans to gold for a long time, and today it’s widely used to speculate on price fluctuations.
Let’s look at what exactly is CFD and how it can be utilized to get exposure in the cryptocurrency market.
What exactly is CFD and how can it be used into cryptocurrency trading
The financial derivatives known as Contracts for Difference created by way of futures contracts signed between a trader or broker. They are settled with cash, not by the transfer of physical goods or assets.
In essence, CFD traders do not really deal with the underlying asset. Instead, they have the right to get any difference in the present price of an asset and its expected value. If they are accurate in their forecasts of the future value of the asset, they get the difference. If not they are required to pay the losses by paying the differential to the brokerage. This method is suitable for any kind of asset, which includes cryptocurrencies.
How does it work
Let’s say that you’re certain that the cost of Bitcoin is likely to rise significantly in the near future and you wish to make a profit from this price rise. You can purchase some coins from the cryptocurrency exchange, however it can be quite tiring and can be a bit complicated, particularly if your investment plan is just less than a few hours and you’re novice to dealing with digital currency. In this instance you may consider buying a difference contract instead of buying real Bitcoin or an option called a futures contract which usually has longer time frames and higher charges.
Many of the leading trading firms have already responded to the increasing interest in trading with cryptos and have added CFDs for diverse digital currencies to their portfolios of instruments that can be traded. This means you shouldn’t struggle to find an online broker that has the right trading conditions. For instance, you could enter into a contract for differences in conjunction with eToro as well as any company that trades at the current price, with settlement scheduled for the close of business.
If you are right about future price changes and Bitcoin rises in the duration of the CFD the broker will pay your the amount that is higher. However in the event that your prediction is wrong and you lose money, you are required to pay for the difference in price with the brokerage. In essence, you wager on whether the value of the currency will decrease or rise in a specified period of time. Since neither you nor your partner is required to have actual Bitcoins for this contract for difference gives investors an easy and simple method of making money on the changing market conditions for cryptocurrency.
Benefits from cryptocurrency CFD trading
Many traders are looking for the exposure of cryptocurrencies with reputable brokers through CFDs because this type of investment has many advantages over direct purchasing and selling of cryptocurrency.
Easy to start
Trading in cryptocurrency is usually linked to technical problems. people who aren’t technologically adept can be frightened by the processes for opening a wallet and verification procedures on an exchange for cryptocurrency, and other cryptocurrency-related nuances. They usually rely on trusted brokerages with years of experience in customer relations as well as simple account setups and features for trading that are one-click. In addition people who engage in CFD trading of other products tend to utilize the instrument to include cryptos in their range of CFDs and profit from the fluctuation in their prices.
Leverage trading
The ability to leverage high is perhaps the most well-known reason to trade cryptocurrencies using CFD. CFD allows trading with more capital than the trader can. This means that using 5:1 leverage, you’ll need just $500 to start an account worth $2500 and you can make a significant profit , even with tiny price fluctuations. Since the regulations governing digital assets are not binding brokers, they have the freedom to choose the amount of leverage they will provide. The reason for this is that the margins of CFDs tend to be greater than those on futures contracts, or the underlying asset. However, leverage can increase the chances of earning as well as potential loss, so you must be cautious when trading CFDs for cryptos that leverage.
Leverage is provided by the majority of brokers. However, most cryptocurrency exchanges , aside of Bitmex, Kraken, and Poloniex do not offer this type of option.
Modern technology instruments
When trading CFDs for cryptos through an existing broker, you will have many options of technologies and risk management tools such as stop loss tools and take profit tools. In light of the extreme volatility in the market for cryptocurrency, these tools could prove useful to protect you from catastrophic losses. Additionally advanced tools for charting and the analytical assistance offered by brokers can help you make better investment decisions , and boost the overall performance of your business.
The speed of trading
For CFD it is not possible to really buy the digital currency or trade it. the transactions are completed in a flash through the trading platform of the broker. This gives you flexibility and lets you react swiftly to market changes. However, transactions on the cryptocurrency blockchain can take hours or even days depending on the currency and the network’s capacity, meaning that traders will not be able benefit from market fluctuations that are rapid.
Customer support
Support from customer service is helpful in situations where you require assistance with how to set up your account, trade, or if you are facing technical problems. Although all CFD brokers offer support through different channels, including phone, email or live chat However, the majority of exchanges will keep clients waiting long periods or allow them to solve the issues themselves.
Better regulation
The majority of CFD cryptocurrency brokers are licensed through CySec, FCA, or any other financial watchdog that is reputable. The result is that clients of a company that trades are protected from bad practices, fraud and theft outright. In addition, in the event of bankruptcy or similar negative circumstances, traders can seek compensation and receive the entire or a portion of their cash returned.
The disadvantages from cryptocurrency CFD trading
With all the benefits and value-added benefits, CFDs for cryptocurrencies has some disadvantages and drawbacks that are worth considering prior to putting your money into it.
Cost considerations
CFD crypto trading is accompanied by the cost as a spread that is the difference between buying as well as selling price. The spread is payable in full regardless of the outcome the transaction, which is why you’ll first experience losses the moment you begin the CFD position. CFD position. The more riskier and less liquid an asset you choose to trade and the more spread you are charged.
Other than that the majority of CFD brokers charge fees to hold an CFD position for a period of time from one day to the following day. They are calculated based on a percentage of the LIBOR rate, and could be extremely excessive in the case of Bitcoin and other cryptocurrencies due their volatility. This means that the anticipated price movements is likely to be higher than the amount that pay for commissions on trading and generate profit.
Considerations regarding trust
The trading of cryptocurrencies through the help of a CFD broker is built on a large level of confidence. You must ensure that the prices you see on the platform of your broker are in line with market trends and are sourced via an exchange. Unfair brokers could manipulate the price of cryptocurrency which can result in unnecessary losses to customers’ accounts. Furthermore there are some CFD broker have stopped trading in cryptocurrency, making their services less reliable in terms of ongoing service.
Black Swans and Brokers
In December 2017 , some CFD brokers began to limit their exposure to cryptocurrency because of the risk of Black Swan events as well as the small hedge opportunities through CBOE or CME futures.
Markets that were lopsided allowed traders to earn quite quick dollars, putting brokers in debt as well as forcing them stop their cryptocurrency products or reduce exposure stopping the opening of new positions.
Thin portfolio
This is perhaps one of the main negatives to trading cryptocurrency using CFD brokers. Their list of available coins for trading is considerably less than those of cryptocurrency exchanges. That means traders have to restrict their strategies to only a handful of popular coins and are not able to profit from price fluctuations of the hottest newcomers or assets that are less liquid.
Selecting a cryptocurrency broker CFD trading
CFD trading options are becoming popular for market participants, with a variety of old and brand new brokers appearing to provide CFD trading opportunities to customers and meet the growing demand.
When selecting a broker it is crucial to comprehend the fact that CFD trades are based upon a contract kind of relationship between the company that trades and its customer and not a buy-and sell kind of transaction. That means your profits or loss is determined by the prices that are recorded at the beginning and conclusion of the trade. Make sure your broker is using trustworthy data for trading and doesn’t alter prices. If they don’t, you won’t be able to profit from price fluctuations in cryptocurrency regardless of how reliable and accurate the forecasts you make. This is a difficult problem since there isn’t any official source of cryptocurrency quotes as prices at various exchanges could be drastically different.