Traditional cryptocurrency trading done through crypto exchanges is known to most crypto enthusiasts. What is, however, isn’t that widely spread is trading cryptocurrencies with contracts for difference (CFDs). Today we are going to look into this relatively complex financial tool and explain it to you in plain English.
What this CFD instrument is?
A contract for difference, simply put - is a contract between a trader and his broker. If a trader buys a contract on bitcoin, he does not own this cryptocurrency, but he is in possession of a contract which states at what price he bought the coin. A trader can get out of his position at any time and sell his contract back to the broker. Given his prediction was correct, he will receive additional profit on the investment. In case he forecasted the market incorrectly, a certain amount will be deducted from his investment. As a CFD cryptocurrency trader, you can invest on the growth of cryptocurrencies as well as on their decline.
Terminology for every CFD Crypto trader
To understand the basics of CFD trading, you should learn the most common terms that you will see at every corner.
Long position - You open a long position If you think that the market will go up.
Short position - You open a short position If you think that the market will go down.
Spread – The most common fee that CFD crypto brokers charge. A spread is the difference between the bid and ask price. E.g Crypto broker sells you one bitcoin for $6,700 but buys it back at $6,600. Through this fee, the broker makes most of its money. To compare spreads at CFD crypto brokers you can either use websites that compare brokers or you can visit each crypto broker on your own.
Leverage – This tool will multiply your capital. Every European regulated broker by the CySEC or by the FCA has a maximum leverage 2:1 for cryptocurrencies. When this leverage is used your profits will double if you correctly predict in which direction the market is headed. Note that this feature does not multiply only your winnings, but also your losses, in case your forecasts are inaccurate.
Stop loss – in order to avoid losing your whole investment you can use a stop loss feature that will automatically activate and close the trade when your cryptocurrency drops to a certain value that you have set.
Take profit – In contrast, a take profit closes automatically your trade at a certain profit that you predetermined before you opened the trade.
Types of investors for whom CFD crypto trading is suitable
Trading with leverage, or as we often say margin trading, is not for every cryptocurrency admirer and I would recommend it only to traders who want to stay in a position for a couple of minutes or hours. If you decide to stay longer, some CFD crypto brokers might charge you an overnight fee. That said, margin trading can be extremely profitable if done properly. Take for example the investment opportunity when XRP increased in value by 84% in just a day. Such huge opportunities do not present themselves on an everyday basis, but as we all know the crypto market is extremely volatile even without them.
Advantages of CFD cryptocurrency trading
In comparison to traditional crypto trading, CFD crypto trading has some great benefits. First of all, executing trades is extremely fast and one can not only invest funds on the growth of cryptocurrencies but also on their decline. Secondly, anyone can open a free demo account that does not require any initial investment. This practise version can come in very handy especially for novice crypto traders. Thirdly, you can start trading cryptocurrencies with even as little as $10 and you can use your broker’s customer support at any time.
Disadvantages of CFD crypto trading
Most CFD crypto brokers offer only a very limited number of cryptocurrencies to trade. The most coins you’ll likely see is 12, but the average number hovers at around 6. Another vast drawback is that the bigger portion of CFD brokers in the industry charge an overnight fee. So, if you let your position open for a few days your balance might take a heavy hit just because of this fee.
The bottom line
I deliberately sorted leverage to neither pros nor cons because it can be both. While there is an opinion that CFD cryptocurrency trading has some great benefits over traditional crypto trading, its not suitable for every trader and investor. This article was supposed to open a gate to yet another financial instrument that might look complex at first but it really isn’t (at least the basic principle). If CFD crypto trading caught your attention and you would like to practise it yourselves go for a demo version. By doing so, you will not risk losing any of your money and perhaps you will find out to your own surprise that this type of trading is right for you.
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