Everything You Need to Know About Cryptocurrency CFD trading


Although fiat currencies claim centre stage in the financial markets, the cryptocurrencies bandwagon has been calling.

A cryptocurrency is a digital asset, a virtual currency liquid enough to function as money. According to CoinMarketCap at the time of writing, the total cryptocurrency market capitalisation (market cap) stands at an eye popping 730 billion USD.

In addition to trading through a crypto exchange, retail investors (or traders) trade cryptocurrency CFDs (as well as futures contracts). CFD products mirror underlying assets and form a contract (or agreement) between two parties (defined as a buyer and a seller) to exchange the difference between the opening and closing price.


Trade Crypto CFDs on Your Existing Forex Trading Platform

Opting to purchase cryptocurrencies through an exchange involves taking ownership, storing cryptocurrency in a digital wallet. With storage issues occasionally causing problems, trading cryptocurrency CFDs from an existing trading platform is an option.

Popular trading platforms, particularly for Forex traders, are MetaTrader 4 (MT4) and MetaTrader 5 (MT5). The aforesaid platforms also conveniently allow traders to trade cryptos in the same way traditional currency pairs are traded.

In addition to the above, since most brokers allow clients to trade on margin, employing leverage is a prominent feature when trading crypto CFDs. The margin requirement represents a percentage of an account’s equity set aside (by a brokerage) to initiate a trading position, generally referred to as initial margin. It is in place to safeguard both parties within CFD agreements.


Cryptocurrency CFDs: Bitcoin (BTC)

While thousands of altcoins are available (altcoins are cryptocurrencies released following bitcoin – think alternative coins), BTC remains a dominant force in the crypto space (market cap: 515 billion USD [CoinMarketCap]). For that reason, BTC CFDs are a popular choice amongst retail traders.

Financial instruments bearing a close resemblance to BTC CFDs are Forex currency pairs. A BTC CFD is organised by pairing the cryptocurrency against a fiat currency (or an altcoin), such as the US dollar (USD – BTC/USD) and the euro (EUR).

To speculate on the price of bitcoin, traders must either go long (buy) or short (sell). Successfully trading cryptocurrencies, however, requires detailed knowledge of the technology behind the traded crypto, and often a well-defined technical trading strategy. With respect to bitcoin, it is imperative to understand blockchain technology (a public record of transactions), its different types of users and how transactions are established.







Cryptocurrency CFDs: Ethereum (ETH)

Ethereum (ETH), boasting the second-highest market cap at 83 billion USD (CoinMarketCap), is also a popular altcoin. Sometimes referred to as ether, ETH takes blockchain technology to another level by making it programmable.

According to Blockchain.com:

Ethereum is a distributed public blockchain network that focuses on running programming code of any decentralised application. More simply, it is a platform for sharing information across the globe that cannot be manipulated or changed.





Technical Trading

Short-term technical traders frequently monitor the 20-day simple moving average (SMA) versus the 50-day SMA. Moving averages are used in a number of ways to generate trading signals, though is beyond the scope of this article to define each in detail. However, trading any technical indicator in isolation, including moving average strategies, is not recommended. Trading at areas of confluence is what many chartists (technical analysts) strive for. Confluence is a combination of technical tools fusing at a specific price area.

As an example, a supply or demand area forming alongside a trendline (price action trading) and a moving average (moving averages can serve as dynamic support and resistance levels) delivers a zone of confluence to work with. The more reasons traders have to buy or sell at an area, the more likely it’ll influence price movement and produce a winning trade.

An area of confluence also helps determine risk parameters, providing an objective base in which to arrange entry and protective stop-loss orders.


Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC)

Other popular cryptocurrencies to monitor are XRP, BCH and LTC. The latter (the fifth largest altcoin by market cap [CoinMarketCap]) has displayed healthy potential over the years, while the former (the fourth biggest altcoin by market cap [CoinMarketCap]) fell sharply in recent days following the announcement of an SEC suit.

Irrespective of the asset traded, rigorously testing technical indicators along with a thorough understanding of the dynamics behind the market of interest is vital.


Other Points to Consider:

  • When trading cryptos on an exchange, liquidity can be significantly reduced. The probability of this happening is small, though is still worth taking into account if you intend to trade via an exchange. Like all products that have not yet stood the full test of time, cryptocurrencies could still experience a ‘loss-of-confidence’ scenario.
  • Wait for the market to come to you. Despite the extreme moves seen in BTC/USD during November and December (up more than 80 percent), chasing the market seldom works. This is why it is important to operate with a well-defined trading plan, a blueprint designed not only to inform when and where to trade, but also to govern risk: a risk-management system.
  • Retail investor accounts based in some parts of the world, such as the UK, are not permitted to trade cryptocurrency CFDs. This is due to the UK’s financial watchdog, the Financial Conduct Authority (FCA), banning retail investors from purchasing crypto-based financial products. The ban comes into effect on 6 January 2021. However, this only affects retail clients.
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