What Is Cryptocurrency CFD? (Benefits and Risks)
A contract for difference (CFD) is basically an agreement that is based on an asset. In the case of cryptocurrency CFDs, the asset is a cryptocurrency, like Bitcoin, Ether or Litecoin. As you start CFDs trading, you speculate on value increasing or decreasing. You do not own cryptocurrency but make gains based on your predictions of whether or not crypto price goes up or down.
How Does A Crypto CFD Work?
With a crypto CFD, you speculate on a crypto pair, like BTC/USD, ETH/USD or BTC/ETH. When you think the value of a cryptocurrency will go up, you choose the “go long” option. When you think that the value will go down, you choose the “go short” option. This allows you to profit from falling and rising markets.
Before you trade crypto CFDs, you need to understand that you open an account with a trader. A small deposit is needed and the trade is actually a percentage of the total value. This is known as a trade margin, which is expressed in percentages, like 5%, 20% and so on. When you open a CFD trade that is worth, let’s say, $1,000, you have to deposit just $50 to trade. You still gain 100% of the gains that appear when the price moves exactly as you predicted.
Margin trading allows you to drastically magnify returns as you can earn a lot when you commit a small amount. However, it also automatically means that all losses are magnified since these are also calculated based on full position value.
What Terms Should You Know?
- Ask price – the price at which the CFD is bought.
- Bid price –The price at which the CFD is sold
- Leverage –A trading tool allowing you to sell and buy CFDs with the use of more capital than you physically have available.
- Margin– How much money is needed to open CFD positions, expressed as a percentage.
- Stop Loss– This is an order that can be defined as a trading tool you use to set predetermined price levels at which the CFD position is closed.
- Take Profit– Similar to the stop loss but you set a price level at which the position is closed in order to guarantee the desired profit.
Main Benefits Of Crypto CFD Trading
While many of the benefits associated with crypto CFD trading are the same as when using CFDs of other assets, those that you have to always remember are:
- Margin trading can lead to magnified gains.
- Cryptocurrencies can be traded without having to own them.
- You do not need a cryptocurrency wallet or have to deal with exchanges.
- It can take advantage of both falling and rising markets.
- You can start with the use of fiat currency.
- Trading is possible on platforms that are regulated.
- Platforms offer very good customer support, usually a lot better than the cryptocurrency exchanges.
- You can access many popular cryptos.
- Take-profit and stop-loss tools are available to
Potential Risks Of Crypto CFD Trading
As with any trading, crypto CFD has its potential risks:
- Margin trading can lead to magnified losses.
- It is possible to lose a lot more than the initially deposited amount.
- You cannot hold for a long time.
- Cryptocurrencies stand out as much more speculative and volatile as other assets.