How Crypto Cfds Work
Interest in cryptocurrencies has grown sharply in recent years, and with it the number of trading platforms that give clients access to global crypto markets. A wide range of providers has expanded its crypto services, including offering contracts for difference (CFDs) on several popular cryptocurrencies.
Bitcoin, the best-known of these, is a digital currency designed to work as a medium of exchange. It uses cryptographic processes to record purchases and transfers, and relies on the internet to underpin its value and confirm transactions.
CFD investing has drawn a lot of attention, in large part because of the sharp swings in Bitcoin’s value, notably in 2017 when it climbed above $19,000 by the end of the year. Prices can move just as sharply in the other direction, so past moves are not a guide to future results.
What is a cryptocurrency CFD?
A contract for difference is an agreement based on an underlying asset, usually a stock, an index, a commodity, a currency pair or a cryptocurrency. When you trade a CFD you are speculating on whether you expect the value of the underlying asset to rise or fall. You do not own the asset itself; you are only taking a view on its price.
For every point the price moves in the direction you predicted, your profit or loss is multiplied by the number of units you bought or sold. If the price moves against your prediction, you lose money in the same way.
Cryptocurrency CFDs let you speculate on future changes in the value of specific cryptocurrencies. Many CFDs are opened on a cryptocurrency’s performance against a stable fiat currency, usually the US dollar, but some providers also offer crypto-against-crypto CFDs, for example Bitcoin against Ethereum.
How do cryptocurrency CFDs work?
Crypto CFDs let you speculate on the value of a cryptocurrency pair, such as:
- Bitcoin / US dollar
- Bitcoin Cash / US dollar
- Ethereum / US dollar
- Ripple / US dollar
- Litecoin / US dollar
- Bitcoin / Ethereum
If you think the value of the cryptocurrency will rise, you can buy; if you expect it to fall, you can sell. This means you can take positions in both rising and falling markets, but the outcome depends on how the market actually moves, and either direction can result in a loss.
A crypto CFD is a form of short-term trading. It lets you speculate on price movements without owning the underlying asset. When you trade a CFD you are betting on the difference between the current price and a future price: if the market moves in your favour you gain, and if it moves against you, you take a loss, regardless of whether the cryptocurrency’s price rises or falls.
Features of trading crypto through CFDs
- If you invest directly in crypto, your funds are held in digital wallets. With CFDs, your money sits in an account provided by your CFD broker. The broker’s services are also overseen by financial authorities, which adds a layer of oversight.
- When you buy or sell a Bitcoin CFD you are not actually buying or selling Bitcoin, so you do not have to worry about storing your Bitcoin in secure crypto wallets.
- CFDs can be traded on margin, and leverage lets you open a position much larger than your own capital. Leverage magnifies gains and losses alike: it can increase any profit on the borrowed amount, but it can also increase your losses beyond what you deposited, and you still pay the broker’s fees either way.
- Because a CFD lets you go long or short, you can take positions when prices rise and when they fall. That includes taking a view on falling Bitcoin prices, though such positions carry the same risk of loss as any other.
Buying cryptocurrency or trading crypto CFDs: which is better?
Whether you prefer to buy and hold a cryptocurrency, trade crypto CFDs, or follow both approaches depends on your personal preferences and trading habits.
Buying a cryptocurrency, holding it for a period and selling it later is one of the more common choices among investors who want longer-term exposure.
Crypto CFDs, on the other hand, are generally seen as suited to traders who focus on short-term positions, where lower spreads make it easier to act on price movements. They also involve leverage and short holding periods, which raise the risk.
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