CFD stands for “Contracts For Difference” and essentially represents a contract between two parties, one agreeing to pay the other the price difference should see an asset rise or fall beyond a certain point. A trader could lose more than their initial deposit should the market move against them. It is important to note that CFDs are not regulated by any government body and allow traders to bet on markets without owning the underlying asset.
Cryptocurrencies have seen explosive growth in interest over recent years, but a significant portion of the population has yet to invest. In fact, according to Statista, cryptocurrencies reached an all-time high of approximately 180 billion U.S dollars’ worth of investments in January 2018.
One of the main obstacles often cited for not investing in cryptocurrencies is a lack of knowledge and understanding about making such investments. The cryptocurrency market moves extremely quickly, with values rising and falling by hundreds or even thousands of dollars overnight. As well as this, cryptocurrencies do not follow any standard financial model; they are incredibly volatile and challenging to predict, making them attractive to investors but challenging for brand new traders.
What exactly is Cryptocurrency CFD Trading?
Cryptocurrency CFD trading enables investors to trade in instruments related to bitcoin, ethereum, litecoin and other popular cryptocurrencies without owning any of them. They are only contractually obligated to pay the difference between the current price of a crypto asset and its value when you close out your trade. You can take advantage of fluctuations in the market without having to risk any capital on digital currencies themselves.
How can I benefit from CFD trading?
As an investor, many benefits come with cryptocurrency CFD trading compared to owning cryptocurrencies directly. Not only does it not require actual ownership of them, but your potential losses are capped at what you invest – meaning you cannot lose any more than what you put into the trade.
It’s worth noting, though, that this applies if your position is closed before an asset has reached its expiry date; if you go past the expiry date, then you may be subject to further ‘rollover’ fees. Furthermore, because your losses are capped, this allows you to take more positions than you would otherwise since the risk is minimized.
CFD trading could lead to significant losses or gains beyond your initial deposit, meaning that you could end up owing more than you initially invested. Bloomberg reported that it is possible for a trader to lose more money on a CFD trade than they would if they owned the underlying asset.
Risks associated with CFD trading
Firstly, since CFD trading platforms are considered derivatives, they often carry a significant amount of risk, which far outweighs that of traditional cryptocurrency exchanges.
Secondly, due to the unregulated nature of CFD brokers in the cryptocurrency market, investors will have a hard time holding them accountable for any losses incurred due to fraudulent business practices or technical failures.
Thirdly, because these brokers allow clients to trade with only a small deposit, inexperienced buyers can open an account and lose their entire investment within minutes, if not seconds.
And finally, there is no guarantee that you will receive your original investment back from your CFDs purchase even if you do it correctly – sometimes, your broker may decline your request for a withdrawal.
Final Word
All in all, CFD trading on cryptocurrencies is a great way for people who invest in bitcoin and other cryptocurrencies to broaden their portfolio with digital assets that they might not otherwise have access to due to lack of funds or have no interest in owning them directly. By following the advice found here, you can get started right away by opening an online account with reputable cryptocurrency brokers such as bank and start trading on a demo account before investing your money.