Cryptocurrency CFDs (contracts for difference) are contracts that allow traders to speculate on the price movements of cryptocurrencies without actually owning the underlying asset. CFDs are a popular way to trade cryptocurrency as they offer high liquidity and allow traders to use price movements in both directions to their advantage.
Let’s look at what cryptocurrency CFDs are, how they work and some of the benefits and risks of trading them. We provide tips for how new traders can safely and profitably trade cryptocurrency CFDs.
What are Cryptocurrency CFDs?
Cryptocurrency CFDs are contracts between the buyer and the seller speculating on an asset’s price movement. In CFDs, both parties speculate on whether the price will be above or below the current market price at a particular time in the future.
The seller is obliged to ensure that one party or other benefits from favourable movements and pays out if there are losses – so if a trader bets £100 against a cryptocurrency CFD and the price rises by 10%, they would make a profit £10. However, if it falls by 10%, they would incur a loss of £10.
How do Cryptocurrency CFDs work?
Trading cryptocurrency CFDs doesn’t require traders to hold any Bitcoins – instead, all transactions occur between traders and their brokers who facilitate them. If you plan on trading Bitcoin CFDs, you will need to open an account with a CFD broker and deposit funds. The funds are immediately available to you to trade on the price movements of Bitcoin (and other cryptocurrencies).
Cryptocurrency CFDs are available through most online brokers and offer high liquidity, making them a popular choice for traders. When trading cryptocurrency CFDs, you are constantly dealing with the market price – so there is no need to worry about buying or selling at the ‘right’ time.
The benefits of trading cryptocurrency CFDs
- High liquidity: Cryptocurrency CFDs are one of the most liquid markets around and offer access to very high trading volumes so that you can take advantage of significant price movements.
- Market knowledge: Cryptocurrency CFDs are market traded, so you don’t need to do any technical analysis or understand the underlying asset to trade them successfully.
- Leverage: Cryptocurrency CFD prices are based on leverage – this allows traders to place larger trades than they would be able to if they were buying or selling Bitcoin for cash directly. It makes it possible for traders to put down relatively small amounts (£100) and take advantage of potentially huge returns (10%+). However, this can also make losing trades much bigger too.
- Low fees & no commissions: Most CFD brokers offer cryptocurrency trading with no commissions and relatively low prices.
- Shorting: Many brokers(view website) offer the ability to short cryptocurrency CFDs – this allows traders to benefit from falling market prices and rising ones.
Risks involved in cryptocurrency CFD trading
- Leverage: Trading on high leverage levels makes it easy for new traders to lose a lot of money quickly if they don’t understand how CFD trading works or if their trades move against them. For this reason, it is essential that you trade responsibly and only use leverage when confident in your abilities. Failure to do so may incur significant losses, forcing you to close your account.
- Liquidity: Cryptocurrency CFDs are a very liquid market, and large trades can be placed quickly and easily. However, this also means that the market can move against you quickly, so it is essential always to use stops and limits to protect yourself from significant losses.
- Price volatility: The prices of cryptocurrencies are incredibly volatile, making them risky to trade. Prices can rise or fall rapidly over short periods, so it is essential to watch the news and events that could affect the cost of the cryptocurrency you are trading.
If you’re a novice trader and do not know cryptos or the ins and outs of CFD trading it’s advisable to seek advice from a reputable broker in your region.