Cryptocurrencies quickly emerged as one of the leading asset classes in which to invest. When they first appeared on the market, they were seen as a niche investment for tech insiders with trading experience.
But now, cryptocurrencies are available whether you’re trading directly or through instruments like Contracts for Difference (CFD). CFDs allow you to agree with the broker to trade and invest in cryptocurrency instead of opening a position directly. Let’s take a closer look at crypto CFD trading.
What is a Cryptocurrency CFD?
A CFD for cryptocurrencies is a way to invest in these digital coins. Traders speculate on prices instead of directly owning digital currencies. When you trade cryptocurrencies through CFDs, you can enter the market and invest in coins without paying the entire value of the trade.
With a crypto CFD, you don’t need a crypto account or a wallet. This opens more trading opportunities for investors as they speculate on the future value of the coin without owning it.
You can open a contract on the performance of a crypto related to fiat currencies, like Bitcoin to the US dollar, or a crypto related to another crypto, like Bitcoin and Ethereum.
Benefits of Cryptocurrency CFD Trading
There are different benefits of cryptocurrency trading through CFDs. Trading CFDs involves exchanging the difference in the price of a cryptocurrency between its opening and closing position.
For example, if a trader is in a long position and the value of the coin increases, the trader profits, but if the value decreases, they will incur a loss. A short position is better if you expect the value of the coin to decrease in the future.
Advanced Technical Instruments
When you trade cryptocurrencies with CFDs, you get access to risk management techniques like profit and stop-loss tools. These can protect you from losses and help you make informed decisions when trading. You can often find the instruments for investing in crypto CFDs through a reliable crypto trading platform.
Better Regulations
A reliable financial authority regulates CFD brokers, protecting even your crypto trades. Rather than directly buying cryptocurrency and opening yourself to risk, you can trade crypto CFDs and prevent malpractices, theft, and fraud. You can also get your money back as CFDs are licensed, insured, and secure.
Trading on Margin
When you trade with crypto CFDs, you get high leverage in the market. It allows you to trade with more capital, offering decent profits and only a minor price movement. For instance, if you want to open a position worth $2,500 with a leverage ratio of 5:1, you only need $500 on hand.
Higher Liquidity
Trading in cryptocurrency CFDs offers more liquidity than directly trading the coins. CFDs don’t require conversion from one currency to another, so you can withdraw your money directly. It’s also less complicated than buying coins, and you don’t have to deal with the withdrawal limit.
Quick Executions
CFD trades are very quick to execute. They allow traders to react to market price movements immediately and benefit from changes in the market.
Does Not Require a Digital Wallet
You don’t need a digital wallet or to register with an exchange when trading crypto CFDs. There’s no risk of holding the currency and having to keep it safe. Trading crypto CFDs are based on risk management strategies, so although digital coins are volatile, you are protected.
Risks of Cryptocurrency CFDs
You should also keep the risks in mind when trading cryptocurrency CFDs. For one, there are leverage risks, as losses can increase the same way as gains. Leverage in CFD trading is beneficial for returns and risks. If the market moves against your position, you can lose more than your initial investment.
Volatility is always a risk in cryptocurrency CFDs, even though there’s a measure of protection available to you. If the market is too volatile, you can find yourself on the losing side.
Another risk is the counterparty risk, especially since you’re entering into a contract with the broker. If the broker becomes insolvent or does not honor the contract, you can suffer losses.
How To Trade Cryptocurrency CFDs
If you’re looking to trade crypto CFDs, the first step is to look for an established broker that offers well-rounded customer service and learning resources.
Find a Good Broker
The first and most important thing is to choose a reliable and regulated broker. Ensure that it is a regulated entity with a good reputation.
Furthermore, leverage is an important factor, so make sure you are comfortable with the leverage levels. Other factors include available cryptocurrencies, spreads, trading platform offered, ease of payment and quality of services.
Open An Account
Now, you can open a trading account. Many traders will allow you to open a demo account so that you can get used to the platform. After that, you can upgrade to a live account.
Set Up Your Plan
After choosing your trading instruments, set up your trading plan. Cryptocurrency is volatile, so consider all the risks when putting the plan together. List out the goals, check how much risk you can take, and outline a strategy. Your broker will provide you with the resources needed to make the plan.
Start Trading
Now, you can start trading. Enter a long/buy position or short/sell position, depending on what you expect. When trading, check the ask and bid prices, use risk management tools, and monitor the profit or loss in the open positions. Once you’ve achieved the goal, close the position.
Crypto CFD Trade Pairings
Cryptocurrencies are paired with the US dollar (USD) and euro (EUR) or with each other when trading CFDs. Some of the major asset codes with crypto and fiat currencies include BTC/USD, ETH/USD, BCH/USD, LTC/USD, ETC/USD, DSH/USD, XLM/USD, EOS/USD, XRM/USD, and ZEC/USD. EUR is also paired with these currencies.
On the other hand, there are BCH vs BTC, DSH vs BTC, EOS vs BTC, ETC vs BTC, ETH vs BTC, LTC vs BTC, XLM vs BTC, XRM vs BTC, and ZEC vs BTC.
Taking Advantage of Cryptocurrency CFDs
It’s easy to get started with cryptocurrency CFDs and take advantage of the trades. To take your first step, you should explore a demo trading account and different broker options before you settle on one.
This allows you to explore crypto CFD trading without risking any money. Once you’re ready to maintain an account with real funds, this guide can direct your efforts there, too.
