19 min Beginners Beginners
At the dawn of blockchain, virtual coins were traded through dedicated cryptocurrency exchanges or via the OTC market, where the buyer and the seller arranged to purchase and sell coins directly between themselves.
However, as time passed, cryptos turned from a niche thing known to a small group of computer geeks into a wildly popular speculative asset that required more trading tools and options. That is where contracts for difference - or CFDs for short - came in handy. It has been a favorite instrument for trading anything from gold to soybeans for decades, and now it is widely used to speculate on cryptocurrency price movements.
Let's take a closer look at what is CFD and how it can be used to gain exposure at cryptocurrency market.
What is CFD and how it fits in cryptocurrency trading
Contracts for Difference are financial derivatives made in the form of futures contracts concluded between a trader and a broker and settled in cash payments rather than by the delivery of physical goods or assets.
Basically, CFD traders do not actually deal with the underlying asset; instead, they get the right to receive the difference between the current cost of an asset and its future value. If traders are right with their predictions of the asset's future value they pocket the price difference; otherwise, they have to cover the loss, by paying the price difference to the broker. This system works nicely for any type of the asset, including cryptocurrencies.
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How it works
Let's say you are sure that the price of Bitcoin will rise substantially soon and you want to profit from that price movement. You may go out and buy some coins at a cryptocurrency exchange, but the procedure is pretty tiresome and sometimes complicated especially when your investment horizon is a couple of hours, and you are a not experienced in dealing with digital money. In this case, you can opt for buying a contract for difference, instead of purchasing real Bitcoin, or even a futures contract that usually implies longer time-frames and higher fees.
Most of the major trading companies have already responded to the growing interest in crypto trading and added CFDs for various digital assets to their lists of tradable instruments. It means that you won't have problems finding a broker with suitable trading conditions. For example, you may sign a contract for difference with eToroor any other trading company at a current price with the settlement at the end of business day.
If you got it right about the future price movements and Bitcoin grows higher within the lifespan of the CFD, the broker pays you the difference. On the other hand, if your forecast proves to be wrong, you lose money as you have to compensate the price difference to the broker. Basically, you bet on whether the price of the asset will drop or rise within a specific time. As neither you nor your counterpart has to own actual Bitcoins to do that, contracts for difference offers investors hassle-free and straightforward way to generate profits on changing cryptocurrency market conditions.
Advantages of cryptocurrency CFD trading
A lot of traders seek cryptocurrency exposure with established brokers via CFDs as this type of investment option has various benefits over direct buying and selling cryptocurrencies.
Easy start
Direct cryptocurrency trading is often associated with technical issues. People who are not tech-savvy are sometimes scared by wallet opening procedures, a verification process on a cryptocurrency exchange and other crypto-related nuances. They tend to resort to familiar brokerage services with a long experience of customer relations, easy account set-ups, and one-click trading features. Apart from that, those engaged in CFD trading for other products are more likely to use this instrument to add cryptos to their existing portfolio of CFDs and benefit from their price movements.
Leverage trading
Access to high leverage opportunities is probably the most popular reason for trading cryptocurrencies via CFD. This tool allows trading with more capital than a trader actually has. It means that with a 5:1 leverage you need only $500 to open a position worth $2,500 and earn a considerable profit even with small price movements. As regulatory requirements towards digital assets do not bind brokers, they are free to decide on how much leverage to offer. That is why margins on CFDs are usually higher than on futures contracts or the underlying asset. However, leverage increases both earning opportunities and potential losses, which means that one needs to be extra careful when trading CFDs for cryptos with leverage.
Leverage is offered by the vast majority of brokers, while most cryptocurrency exchanges - apart from Bitmex, Kraken, and Poloniex - do not support this option.
Advanced technical instruments
While trading CFDs for cryptos with a traditional broker, you have a wide choice of technology and risk management instruments, including stop loss and take profit tools. Considering the notoriously high volatility of the cryptocurrency market, they may come in handy and protect you from devastating losses. At the same time, advanced charting tools and analytical support offered by brokers help to make informed investment decisions and improve your overall performance.
Speed of trading
As in case of CFD, you do not actually buy or sell digital assets; all your transactions are executed in a split second on the broker’s trading platform. It gives you flexibility and allows to react quickly to market movements. Meanwhile, cryptocurrency transaction on blockchain may take hours and even days, depending on the coin and the network capacity, which means that traders won't be able to benefit from rapid market changes.
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Customer support
Customer support is useful when you need assistance on how to set up an account or make a trade or you face some technical issues. While all CFD brokers provide support via multiple channels, including email, phone, and live chat, the majority of cryptocurrency exchanges keep their customers waiting for ages or leave them to resolve the problems on their own.
Better regulation
Most CFD brokers are regulated by CySec, FCA, or some other reputable financial watchdog. It means that customers of a trading company are better protected from fraud, bad practice and outright theft. Moreover, in case of bankruptcy or other similar adverse circ*mstances, traders may apply for compensation and get all or some of their money back.
Disadvantages of cryptocurrency CFD trading
For all its benefits and value-adds, CFDs for cryptocurrencies has some drawbacks and pitfalls, worth considering before putting your money in it.
Price considerations
CFD crypto trading comes with a price in the form of a spread, which represents the difference between the buying and selling prices. You pay it anyway, irrespective the outcome of the trade, that is why you will initially experience losses at the time you enter into a crypto CFD position. The less liquid and riskier an underlying asset is, the wider the spread you pay.
Apart from that, all CFD brokers charge fees for holding a CFD position from one day to the next. They are based on a percentage from the LIBOR rate and may be really high for Bitcoin and other cryptocurrencies due to their volatile nature. As a result, the expected price movement should be more significant to covers the trading commissions and bring profit.
Trust considerations
Trading cryptocurrencies with a CFD broker is based on a significant amount of trust. You need to make sure that the prices on your broker's platform are in sync with general market movements and sourced from an exchange. Some unfair brokers may manipulate the cryptocurrency prices which might lead to unnecessary losses on clients' accounts. Moreover, some CFD brokers have already shut down cryptocurrency trading, which makes them less reliable in terms of continuous service.
Thin portfolio
This is probably one of the most significant drawbacks of cryptocurrency trading with CFD brokers. Their list of coins available for trading is incomparably shorter than the listings of some cryptocurrency exchanges. It means that traders have to limit their strategies to a dozen well-known coins and cannot benefit from price movements of hot newcomers or less liquid assets.
Choosing a broker for cryptocurrency CFD trading
The contract for differences trading options are gaining popularity among market participants with many long-existing and brand new brokers popping up to offer CFD trading opportunities to clients and satisfy growing demand.
When choosing a broker, it is vital to understand that CFD trading is based on a contractual type of relation between the trading company and its client, rather than a buy-and-sell type of transaction. It means that your profit or loss depends solely on the prices registered at the start and the end of the trade. So, make sure that your broker uses reliable trading data and doesn't manipulate prices. Otherwise, you will never be able to benefit from cryptocurrency price movements, no matter how good and precise your forecasts are. It is a challenging issue as currently there is no official source for cryptocurrency quotes, while prices at different exchanges may differ considerably.
Below is the list of large brokers offering CFDs for cryptos
- eToro - offers a wide range of cryptocurrencies, including Bitcoin, Ethereum, Ripple, Litecoin, Dash, and Ethereum Classic among others.
- Plus500- Trade the most popular CFD Cryptocurrencies with leverage and 24/7 availability. Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Neo, Ripple, IOTA, Monero, EOS. "Availability subject to regulation." CFD Service. Your capital is at risk
- Admiral Markets allows you to trade CFDs for Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash with maximum leverage is 5:1.
- IG offers CFD trading only for Bitcoin and Ethereum against USD, EUR, and GBP.
- Markets.com - you can trade Bitcoin, Ethereum, Litecoin, Dash, Ripple, Bitcoin Cash, and Ethereum Classic with this broker.
- XTB is a broker with Bitcoin, Ethereum, Litecoin, Ripple, and Dash available for CFD trading.
- FXOpen offers a variety of coins including Bitcoin, Ethereum, Dash, Litecoin, Emercoin, Namecoin, and Peercoin.
- LMAX offers Bitcoin, Bitcoin Cash, Ethereum,Litecoin, and Ripple
