When blockchain was first introduced the virtual currency was traded via special cryptocurrency exchanges, or through the OTC market in which the seller and buyer agreed to buy and sell coins between them.
But, as time went on the crypto market grew from an obscure thing that was that was only known to a select group of computer geeks, to an extremely popular speculative asset that demanded additional trading tools and options. This is when contracts for difference – also known as CFDs in short were a great help. CFDs have been a popular instrument to trade anything from soybeans to gold for many years, and currently it’s widely used to speculate on price fluctuations.
Let’s look at what exactly is CFD and the ways it can be used to increase exposure to the cryptocurrency market.
What exactly is CFD and how can it be used in the cryptocurrency market?
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 exchange of physical items or assets.
In essence, CFD traders do not really deal with the underlying asset. Instead, they are entitled to an amount that is the sum of the cost of the asset and its value in the future. If the traders are correct in their prediction of the future value of the asset, they can pocket the difference, but if they are not they must cover the cost of the loss by paying the differential to the brokerage. This strategy is great for any kind of assets, even 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 on an exchange for cryptocurrency, but it can be quite tiring and often complicated, especially if your investment time frame is only one or two hours and you’re newbie to the world of digital currency. In this instance you could consider buying a difference contract instead of buying actual Bitcoin or an option called a futures contract which usually will require longer timeframes and more charges.
The majority of major trading firms have already responded to the increasing demand for crypto trading and have added CFDs for different crypto assets into their list of instruments that are tradable. That means you will not struggle to find an exchange that meets your trading conditions. For instance, you could make a deal for difference in conjunction with eToro and any other company that trades at a current rate and the settlement date is at the close of business.
If you are right about future price changes and Bitcoin rises in the time frame of the CFD the broker pays your the amount that is higher. In contrast in the event that your prediction is wrong the loss is yours as you must pay the difference in price with the brokerage. In essence, you bet whether the value of the currency will decrease or increase within a certain period of time. Because neither party is required to have actual Bitcoins for this contract for difference gives investors a simple and easy option to earn profits from the changing market conditions for cryptocurrency.
The advantages that cryptocurrency has over CFD trading
Many traders are looking for exposure to cryptocurrency with reputable cryptocurrency brokers through CFDs because this type of investment choice has numerous advantages over direct buying and selling of cryptocurrency.
Easy to start
Trading in cryptocurrency is typically connected to technical problems. people who aren’t technologically adept can be frightened by the processes for opening a wallet as well as the verification process for an exchange for cryptocurrency, and other aspects of crypto. They usually rely on traditional brokerage companies with extensive experience with customer service as well as simple account setups and features that allow trading with one click. In addition people who engage in CFD trading of other products are more likely to make use of this tool to include cryptos in their collection of CFDs and profit from their fluctuation in price.
Leverage trading
Opportunities to make use of high leverage is perhaps the most well-known motive for trading in cryptocurrencies through CFD. CFD allows trading with greater capital than what a trader really is able to. This means that using 5:1 leverage, you require just $500 to start an account worth $2500 and make a substantial profit , even with tiny price fluctuations. Because the rules governing digital assets don’t bind brokers, they have the freedom to decide the amount of leverage they can provide. This is the reason why the margins of CFDs generally are greater than those on futures contracts, or the underlying asset. However, leverage will increase opportunities for earning and loss, so you must be cautious when trading CFDs for cryptos that leverage.
Leverage is provided by the majority of brokers, however the majority of cryptocurrency exchanges – aside the likes of Bitmex, Kraken, and Poloniex do not offer this feature.
Modern technological instruments
When trading CFDs for cryptos through an established broker, you will have an array of options for tools for risk management and technology such as stop loss and take profit instruments. In light of the volatile cryptocurrency markets, these instruments could prove useful and help you avoid devastating losses. In addition advanced tools for charting and the analytical assistance offered by brokers can help you make educated investments and enhance the overall performance of your business.
The speed of trading
In the case of CFD it is not possible to purchase the digital currency or trade it. the transactions are completed within a matter of seconds through the trading platform of the broker. It allows you to be flexible 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 the rapid changes in market prices.
Customer support
Customer support is helpful for those who need help on how to open an account, trade or when you have technical difficulties. Although all CFD brokers offer support through different channels, including telephone, email and live chat The majority of the cryptocurrency brokers will keep the customers in line for hours or let them solve the issues themselves.
Better regulation
The majority of CFD brokers are controlled with CySec, FCA, or any other financial watchdog that is reputable. This means that the customers of a trading firm are protected from scams, illegal practices and theft outright. In addition, in the event of bankruptcy or other negative circumstances, traders can request compensation and get the entire or a portion of their cash returned.
The disadvantages associated with cryptocurrency CFD trading
With all the benefits and value-added benefits, CFDs for cryptocurrencies has certain drawbacks and risks that are worth considering prior to putting your money into it.
Considerations regarding price
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 the reason you’ll initially face losses the moment you begin the CFD position. CFD position. The less liquid and more risky an asset you choose to trade and the more spread you will pay.
In addition the majority of CFD brokers charge a fee for holding an CFD position between one day and the following day. They are calculated based on a percentage of the LIBOR rate, and could be extremely expensive on Bitcoin and other cryptocurrencies due their volatility. Therefore, the expected price fluctuation is likely to be higher than the amount that cover the commissions for 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. It is essential to ensure that the prices you see on the platform of your broker are consistent with the general market and come via an exchange. Certain brokers who are not honest could alter the prices of cryptocurrency, which could cause unnecessary losses on customers’ accounts. Additionally there are some CFD broker have stopped cryptocurrency trading, making them less trustworthy for continuous service.
Black Swans and Brokers
In December of 2017, a few CFD brokers began to limit their exposure to cryptocurrency because of the risk of Black Swan events as well as the small opportunities to hedge through CBOE or CME futures.
The market was able to earn quite quick bucks , leaving brokers in the red as well as forcing them cease their cryptocurrency products or reduce exposure stopping the opening of new positions.
Thin portfolio
This is perhaps one of the biggest disadvantages of trading in cryptocurrency with CFD brokers. The list of currencies available for trading is considerably less than that of other cryptocurrency exchanges. That means traders have to restrict their strategies to a few dozen known coins, and not profit from price fluctuations of newcomers who are hot or other less liquid assets.
Selecting a cryptocurrency broker CFD trading
CFD trading options are becoming popular among market participants . There are many established and new brokers appearing to provide CFD trading options to their clients and meet the growing demand.
When choosing a broker it is crucial to comprehend the fact that CFD trading relies on a contract type 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 based on the price you pay at the beginning and at the close of the transaction. Make sure your broker is using trustworthy data for trading and doesn’t alter prices. In the absence of this, you won’t have the opportunity to profit from price fluctuations in cryptocurrency regardless of how reliable and accurate the forecasts you make. It’s a tough problem since there isn’t any official source of cryptocurrency quotes as prices at various exchanges could be drastically different.
