If you are looking for a way to access the returns on the cryptocurrency market without actually having to own it, then CFD trading is an excellent solution. Cryptocurrency has become one of the most traded financial instruments in recent years and its value continues to increase day by day. What this means for you as a trader is that there is considerable profit potential from CFD trading cryptocurrencies.
In the article below we will explain how CFDs work, what are their benefits compared with other investment options, and share some tips on trading Bitcoin and other cryptocurrencies using CFDs?
What are Cryptocurrencies?
However, before we go into more detail about how to trade cryptocurrency CFDs online, let us explain what a cryptocurrency is. In simple terms, a cryptocurrency is a digital currency designed to serve as a medium of exchange. It uses cryptography – a practice of encrypting and decrypting information – to control its creation, management, and verification. Cryptocurrencies are a subset of virtual currencies that also includes tokens from games such as World of Warcraft.
Bitcoin is the most commonly traded cryptocurrency in the world. It was created back in 2009 by an anonymous developer or a group of developers operating under a pseudonym. Since then, around 4,000 other cryptocurrencies have emerged – including Ripple and Ethereum – all designed to serve as mediums for fast and secure transactions online.
What are CFDs?
Now that you know what cryptocurrencies are and why traders like them so much, it’s time to give you an idea about what CFD trading is. In fact, if you already know this subject, feel free to skip this section entirely since we will be focusing on how CFD trading works with cryptocurrencies.
A Contract For Difference (CFD) allows two parties – a buyer and a seller – to bet on the price development of an underlying asset. The difference between the opening and closing prices of the contract is settled in cash, not the actual asset.
CFDs are used to trade cryptocurrencies because they offer several advantages over trading digital currencies directly. For one thing, CFD brokers allow traders to speculate on various cryptocurrencies using leverage – borrowing money from a broker to place trades with only a small deposit upfront. This results in huge returns but also carries high risk because you can lose more than your initial investment if the market moves against you.
Additionally, since cryptocurrency prices are extremely volatile, it’s possible to make significant profits by buying assets at their low points and selling them when their value increases again. CFDs allow you to buy or sell a contract rather than the actual asset, so the trader never physically owns a cryptocurrency. This means that even if you have a significant loss when selling your CFD, you won’t have to sell the actual currency you invested in.
Advantages and Disadvantages of Cryptocurrency CFD Trading
There are several advantages to cryptocurrency CFD trading, but it’s also important to understand the risks involved in this type of speculation. The main advantage is that you never have to actually hold a cryptocurrency or wait for it to increase or decrease in value. Instead, once your position is opened, all you need to do is monitor its price movement and close the trade when you’re ready to get out. In fact, if you lose money on a trade due to manipulation or other unpredictable events, you won’t even have to pay any fees because the broker will cover them from their end.
Another great thing about CFD trading is that it can be used to take both long and short positions on cryptocurrency pairs. For example, if you think Ethereum’s value will decrease in the near future, you can open a short position by selling an ETH/USD contract and closing it when the value dips. The same goes for taking long positions – you can simply buy a contract at its current price and close it when its cost increases.
A major drawback of this type of trading is that your losses are only limited to the size of your initial investment because brokers allow you to trade with huge amounts of leverage. This also means that your potential profit is enormous but so is the risk. Another issue with cryptocurrency CDF trading is that not all brokers accept US clients which makes it hard for many people to participate.
How to Start Cryptocurrency CDF Trading?
A cryptocurrency cannot be held in your hand and there is no such thing as a physical Bitcoin. Nevertheless, you can still buy and sell cryptocurrencies using CFDs. This type of trading allows you to profit from the price volatility of digital currencies without ever holding them in your wallet.
To start cryptocurrency CFD trading, you first need to register an account at a CFD broker such as Plus500 or AvaTrade. These brokers offer several different crypto pairs – such as Bitcoin/USD or Ethereum/Bitcoin – so it’s easy to find one that interests you. Commissions for each trade vary according to the broker but most provide competitive rates, especially when compared with other investments like stocks and commodities where commission fees can go into the hundreds (or thousands) of dollars.
Closing Thoughts
Cryptocurrencies have been around for several years now and their popularity has skyrocketed in recent months. Digital currencies are a great way to invest but they also come with high risks that need to be compensated by potentially huge profits. Because of this, many people have started trading cryptocurrencies using CFDs which allow you to speculate on the price movement without ever owning a cryptocurrency outright.
