What Are
Cryptocurrency CFDs?

What Are

Cryptocurrencies or digital currencies are fast emerging as one of the most traded asset classes. This is largely due to their potential role in changing the global financial landscape. Initially, trading in cryptocurrencies was considered to be a niche for tech insiders with trading experience who were well versed with the functioning of digital currencies and their technicalities. That perception has changed with reputed brokers now offering investors a chance to trade cryptocurrencies via instruments such as Contracts for Difference (CFDs).

While some investors prefer to own cryptocurrencies such as Bitcoin (BTC), many are opting to deal in CFDs instead. CFDs allow you to enter into an agreement with a broker over a defined period instead of opening a position directly in the market. At the end of the term of the contract, the difference between the opening and closing prices is exchanged. Before trading cryptocurrency CFDs, it is important to take a look at digital currencies, the reasons for their surging popularity and the manner in which they are traded.

How is Trading in

Since cryptocurrencies are digital assets that use blockchain technology to secure transactions, control the supply and even make transfers, trading them is different from other traditional assets. Price movement in digital currencies is not influenced by the usual economic and political factors that cause fluctuations in forex and stock markets. Instead, cryptos are driven by news relating to regulation, crypto communities and projects.

Reports of possible regulatory control or acceptance by different countries and governments, disagreements within crypto communities over upgrades, attacks on crypto exchanges and the introduction of new crypto-related projects are some important drivers of cryptocurrency values.

The major factors affecting the prices of cryptocurrencies are:

1. Supply: The total number of coins and the rate at which they are released.

2. Market Capitalisation: The value of all the existing coins and how are they expected to move in the future.

3. Image: The image enjoyed by a particular cryptocurrency and its popularity amongst institutions and financial markets.

4. Application: The applicability and integration of a cryptocurrency within existing infrastructure.

5. Events and News: Key events related to the regulation of the segment, security breaches, and launch of new projects.

How Do

There is more to trading cryptocurrencies than simply becoming familiar with the cryptocurrency market. Learning about digital currencies - types, features, functionality and any associated high risks, will benefit anyone interested in cryptocurrency trading.

Unlike traditional fiat currencies that can be physically seen, cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are an internet-based medium of exchange that use cryptographical functions to conduct financial transactions. What makes these currencies highly popular is the fact they are decentralised and highly immune to control by a government or central bank. The use of blockchain technology allows the secure transfer of these coins between two parties through private and public keys. The technology available allows for popular cryptocurrencies to be transferred and traded seamlessly with minimal processing fees.

Bitcoin, the first cryptocurrency, launched in 2009, gained popularity in recent years after its sharp surge from $1,000 at the beginning of 2017 to over $19,000 by the end of that year. This was followed by the launch of futures contracts in Bitcoins, by established exchanges like CBOE and CME, and growing acceptance by institutions across the world. In comparison to the past performance of fiat currencies, the meteoric rise of Bitcoin was like nothing we had ever seen.

There are now more than 1,000 altcoins - alternatives to Bitcoin, but not all of them offer good trading opportunities. There is currently only a limited amount of digital currencies that are traded enough to have real liquidity. The most popular cryptocurrencies are:

  • Bitcoin (BTC), the original crypto

  • Bitcoin Cash (BCH), the first hard fork in Bitcoin’s original chain

  • Ethereum (ETH), an ambitious project that works in a different manner

  • Litecoin (LTC), the alt coin that supports cross-border payments

  • Ripple (XRP), introduced to address issues related to the speed of international payment solutions.

  • Neo (NEO), a unique blockchain based platform that supports its own cryptocurrency

How to Trade in

Exposure to Cryptocurrencies is possible in several ways:

1. Actual Purchase

Digital currency can be purchased using existing fiat currency such as the US Dollar (USD), British Pound (GBP) or Australian Dollar (AUD). Several cryptos are available in limited numbers including Bitcoin which is limited to 21 million coins. More than 18 million are already in circulation with many forex brokers now accepting Bitcoins for currency trading.

The actual purchase or sale of a digital currency is facilitated by a cryptocurrency exchange that trades in that particular currency. Factors to be considered before selecting an exchange to trade digital currencies include reputation, security offered, fees charged, payment options and account verification requirements.

2. Investment Funds

Another method of investing in cryptocurrencies is to go down the path of crypto funds such as Bitcoin Cash Investment Trust or Ethereum Investment Trust. These funds invest in Initial Coin Offerings (ICOs) and other cryptocurrencies. They are recognised as being both more aggressive and more active. The employment of professional fund managers means an increase in costs and fees.

3. Crypto Index Funds

The popularity of digital currencies has seen the introduction of cryptocurrency index funds. They are similar to index funds in the financial market except they focus on digital assets rather than financial products such as stocks and bonds. The selected cryptocurrencies are grouped together and weighted against the market capital. Crypto-10 is recognised as the benchmark cryptocurrency index fund and is commonly used to gauge the volatility and outlook for virtual currencies as a whole.

4. Trading in CFDs

An easy way to trade cryptocurrencies is via a broker. Instead of opening a digital wallet to store actual coins and trade on a cryptocurrency exchange, one can transact with an established and reputable broker who offers trading in cryptocurrencies via a CFD trading account. . Trading CFDs provides traders with the flexibility to go both long and short, since they will be speculating on future price movements of a crypto.

The decision to buy through an exchange or trade in cryptocurrencies via a broker will depend on whether:

1. You wish to take ownership of the cryptocurrency

2. You are willing to pay the full value of the crypto upfront

3. You have an exchange account

4. You are ready to pay additional fees for deposits and withdrawals

5. You have a digital wallet

6. You do not wish to use leverage.

Like all forms of trading, cryptocurrency trading requires knowledge about the market and the use of tested trading
strategies. A comprehensive understanding allows for better evaluation of the potential risks involved.

What are
Cryptocurrency CFDs?

CFDs or Contracts for Difference is an attractive way to trade any assets class since it does not involve the actual purchase of the asset concerned. It allows one to speculate on the future value of the underlying asset, without actually owning it. A cryptocurrency CFD allows traders to predict the future change in the value of a specific cryptocurrency. One can either open contracts on the performance of a crypto relative to fiat currencies, such as the US Dollar and the Australian Dollar, or another crypto, for example Bitcoin in comparison to Ethereum.

Some common terms used in the trading crypto CFDs are:

  • Ask Price: This is the price at which one can buy a CFD.

  • Bid Price: This is the price at which one can sell a CFD.

  • Spread: This is the difference between the ask and bid prices for the underlying asset of a CFD. The spread is the transaction cost to the trader and is deducted from the overall profit made or added to the overall losses incurred. Hence, the tighter the spread, the lower the transaction cost for the trader.

  • Margin: This is the amount of money that needs to be deposited to open a CFD position.

  • Leverage: This allows people to trade cryptocurrency CFDs at a value beyond the capital in their trading account. Leverage allows traders to gain higher exposure by depositing only a small percentage of the full value of the trade. This tool allows traders to enjoy greater profits if the price moves in their favour, but does expose them to greater losses in the event of an adverse move in price.

  • Going Long: When a trader opens a buy position for a CFD, in anticipation of an increase in the price of the underlying asset, it is called going long.

  • Going Short: When a trader opens a sell position, in anticipation of a decline in the price of the underlying asset, it is termed as going short.

  • Stop Loss: This order allows traders to set a predetermined price level at which their CFD position will be closed. This helps minimise losses, if the market moves against the predicted direction.

  • Take Profit: This order calls for setting the price level at which a trader’s position is closed to allow the securing of profits before the market moves against the predicted level.

What are the
Benefits of Trading

Those who trade CFDs exchange the difference in the price of a cryptocurrency or any other asset between its opening position and its closing position. For example, if a trader opens a long position and the value of the concerned cryptocurrency increases, they secure a profit. In contrast, if the value decreases, they will incur a loss. Similarly, if a trader believes that the value of a cryptocurrency such as Bitcoin will decrease in the future, they may enter into a short position. An accurate prediction will generate a gain while a rise in the crypto will result in a loss.

Trading CFDs is highly popular for several reasons:

No Need for a Digital Wallet: Trading cryptocurrency CFDs does not require you to have a digital wallet or register with an exchange. Also, traders do not need to worry about actually holding the digital currency and keeping it safe.

Low Security Threat: CFDs tend to be safer than the actual purchase of cryptocurrencies from an exchange. Carrying out trades through a well-established and registered broker, provides good protection against loss of funds or fraudulent practices such as security hacks.

Volatility and Rapid Movements: Cryptocurrency is recognised as a volatile market and there can be no denying it's volatility, but the rapid movements in price are part of the attraction. Trading crypto CFDs should be based on a proper risk management strategy that has been developed after thorough research.

Continuous Trading: There is no such thing as trading hours when it comes to trading cryptocurrencies. The absence of a centralised governing authority means it is possible to trade cryptocurrencies around the clock. These transactions generally take place directly between individuals on cryptocurrency exchanges across the world. Adjustments to infrastructural updates or forks may, however, lead to periods of downtime. One can even trade cryptocurrencies against fiat currencies such as the US Dollar.

Speculating on Price Movement: Trading cryptocurrency CFDs allow traders to go long or short, depending on their understanding or estimation of the future movement in prices.

Leveraging: CFD trades are leveraged and allow traders to open a position on margin. This means a trader can gain a large exposure to a cryptocurrency market while paying or depositing only a fraction of the full value of the trade. This trading on margin allows traders to make larger profits from a relatively small investment, but the same is the case with losses. So, traders need to be careful and make informed decisions, keeping in mind their risk tolerance.

Use of Advanced Platforms: Cryptocurrency CFDs can easily be traded via advanced trading platforms, like MetaTrader 4 and 5, that come with a customisable interface. These platforms not only make trading simple, but also offer several technical tools to ensure a smooth experience.

What are the Steps Involved in Trading Cryptocurrencies?

Clarity about the working of the cryptocurrency markets, the factors affecting price movements, trading options available are all essential for anybody wishing to trade in digital currencies. This should be followed by a decision about the mode of trading: whether via direct purchase of the crypto or trading through cryptofunds or CFDs. If you decide to trade via CFDs, you need to look for an established broker, who provides excellent customer support and learning resources, as well as a demo account to help you gain familiarity with the nuances of cryptocurrency CFDs.

Here are the steps involved in trading digital currencies:

Step 1:
Finding a Good

This is the most essential and important step for your cryptocurrency CFD trading journey. A well-established and regulated broker should be selected to ensure the safety of your funds and adherence to the concerned regulations. Some factors to be considered while choosing a good broker for cryptocurrency CFDs are:

  • Choose a Regulated Entity: Traders should search for regulated brokers and read any product disclosure statement (PDS) prior to opening and trading with a live account. In Australia, brokers are required to hold an Australian Financial Services Licence (AFSL) while in the United Kingdom, financial services are governed by the Financial Conduct Authority (FCA).

  • Check the Reputation:The record and reputation of a broker should be considered. Check that they ensure segregation of client funds, keeping them separate from the broker’s own capital. Choose a broker who ensures regular financial account audits via external audit firms in addition to providing regular account statements to its clients.

  • Leverage: The leverage is an important factor to consider when trading CFDs. It is not as simple as choosing a broker that offers high leverage trading. Choose a broker who offers leverage levels you are comfortable with.

  • Check the Trade Options and Cryptocurrencies Covered: Ensuring that the trade options offered by a broker include the cryptocurrencies you wish to trade is a must.

  • Trading Platform:Opt for a broker who offers a simple but effective trading platform, such as MetaTrader 4 or MetaTrader 5. These highly user-friendly platforms come with inbuilt tools and resources that make the entire process of trading cryptocurrencies easy and smooth.

  • Spreads: Spreads and commissions charged by a broker determine the cost of trading and need to be considered before you open an account.

  • Quality of Services:Customer support services are very important for traders who are new to CFD trading and may require help from time to time. So, choose a broker known for their excellent customer support services.

  • Ease of Payment: Last but not the least, check the payment options offered by the brokers to ensure that you can deposit or withdraw funds from your account in a timely manner.

Step 2:
Opening an Account

Once you have finalised a broker for your CFD trading, you need to open a trading account. Most reputable brokers allow for the use of a demo account first so that you can get accustomed to the platform, tools and pace of trading. This can then be upgraded to a live account where funds can be deposited.

Step 3:
Building a
Trading Plan

Now that you have chosen your trading instruments, you need to do some research to finalise a trading plan. Since cryptocurrency trading is volatile, you need to develop a trading plan after considering all the risks involved. List out your goals, identify your risk-taking ability and then outline a trading strategy that includes measures like stop loss and take profit levels. You can utilise resources provided by your broker or the in-built options in your trading platform to make informed decisions.

Step 4:
Start Trading

Now that you have a strategy ready you need to take action and enter into a long / buy position, or short / sell position, depending on your expectation of future price directions. Whether you have decided to trade Bitcoin, Ripple or Ethereum, you need to:

  • Check the ask and bid prices

  • Decide the size of your trade position, keeping in mind the leverage offered, the spread being charged and your own risk appetite

  • Make use of tools such as stop losses and limit orders and implement them into your risk management strategy

  • Once you have entered into a position, monitor the profit or loss in the open positions section of the trading platform

  • Close the position once you achieve your target.

How to Manage the
Risks Involved in
Cryptocurrency CFD

The highly volatile nature of cryptocurrencies makes trading highly risky. But a well-planned trading strategy and constant monitoring can help traders manage the risk involved. Mitigation and management of risk and locking in of profits is possible by setting automatic stop or limit levels, besides defining the level at which you wish to close your trade.

Apart from this one should:

  • Always maintain an adequate margin in their trading account to avoid unexpected closures of your positions due to inadequate funds.

  • Set price alerts, to remain aware of larger than expected increases or decreases in the prices of cryptocurrencies.

  • Continuously track your account and the price movements to take swift action.

  • Always use leverage, keeping in mind your risk-taking ability.

So, good knowledge of the working of cryptocurrencies, factors affecting them, and a good trading strategy with adequate risk management measures can help traders experience a satisfying crypto trading journey.

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