What is a CFD in Crypto? A Guide to Trading Crypto CFDs

Since 2008, when Satoshi Nakamoto wrote the famous white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” which gave birth to the concept of digital cryptocurrencies, things have changed a lot! Multiple cryptocurrencies have since come into circulation, while crypto enthusiasts have adopted crypto in their online transactions. At the same time, many things have not changed either. Cryptocurrencies in many countries are not officially regulated, they are restricted or illegal.

Regulators and banks also remain cautious. Many banking regulators have consistently reiterated that it is questionable whether crypto activities in the cryptocurrency space are safe for banks. Following the fallout of crypto companies such as FTX Trading Ltd. and the negative impact to the crypto industry; regulators and officials remain vigilant. Federal Reserve Governor Christopher Waller has warned banks interested in engaging in cryptocurrency activities by highlighting the importance of meeting the ‘know your customer’ and ‘anti-money laundering’ requirements.

The risks may be high in the cryptocurrency universe, and holding real cryptos comes with concerns about the security and safety of crypto exchanges and sharp price fluctuations. However, traders who are interested in trading and want to participate in the crypto space can do so by trading crypto CFDs. With CFDs you can speculate on the prices of cryptocurrencies going up or down, without owning the asset. In this respect, you have the flexibility to speculate on whether a cryptocurrency will weaken or strengthen without being tied to it if you would actually went and bought the real digital asset.

Interesting facts about cryptocurrencies

1. Digital currencies have generated interest as an alternative investment, especially due to the rise in the value of Bitcoin which went from around $1,000 in 2017 to more than $19,000 by December of that year. In October 2021, Bitcoin was worth $61,714.10. In September 2023 it was worth $25,703.40.
2. Some of the biggest banks have invested millions in digital currencies: Goldman Sachs, MUFG, Barclays, JP Morgan Chase, Morgan Stanley, BNP Baribas, Standard Chartered, BNY Mellon, Citibank, UBS, Nomura, ING and BBVA.
3. Digital Currencies are now on Wall Street. The first US bitcoin exchange traded fund launched on 19 October 2021, on the New York Stock Exchange.
4. Cryptocurrency exchanges have grown into billion-dollar companies.

Why trade CFDs on digital currencies like Bitcoin & Ethereum?

Ethereum and Bitcoin are the two most popular digital currencies by market cap. Both are digital currencies traded through online exchanges and saved in different types of digital currency wallets.

They are both decentralised, which means that they are not regulated or issued by a central bank or any other authority. Both use the distributed ledger technology also known as blockchain.

With Ethereum and Bitcoin CFDs, you can buy and sell at any time, without waiting for a seller or a buyer. Also, you have access to leverage which increases your market exposure and size of your position. You can always benefit from any movement of the coins’ price without actually owning the assets.

Finally, you can go long or short and start trading CFDs on digital currencies right away with minimal deposits and low costs. You can also take advantage of the volatility of digital currencies and benefit from improved liquidity.

How crypto CFD trading works

You select a cryptocurrency pair (e.g., BTC/USD) and decide whether you believe its price will go up (buy/long) or down (sell/short).

You determine the size of your position and the leverage you wish to use (more on this later).

You open the CFD position with a broker, and your potential profit or loss is calculated based on the difference between the entry and exit prices.

Risks relating to crypto CFDs

While crypto CFDs may offer many opportunities to modern investors, they come with certain risks.  For one, the cryptocurrency market is famous for its extreme volatility and poses higher risks for potential losses. Rewards could be substantial too, but the market is nonetheless unpredictable. Using leverage in such a volatile market can magnify your losses. Partnering with the right broker who can offer support and security is important, so avoid registering with a broker that doesn’t offer the resources and support you need.

What to consider before trading crypto CFDs

Selecting a reliable broker with a good track record, great customer support, and resources you can depend on is very important. Having a 24/5 customer support where you can ask for help, resolve potential obstacles and ensure you understand all the risks will be extremely valuable for your success down the line.

While it is significant to register with a broker who can provide all the resources and educational research for trading, you also need to study, research and analyse the market. Learn as much as you can and utilise your broker’s resources so you maximise your chances of success. Before placing any trades, conduct technical and fundamental analysis and form a solid trading strategy. Use a demo account to test your strategy before jumping into real trading conditions.

هشدار خطر:

Cryptocurrency CFDs are an extremely high-risk, speculative investment and you may lose all your invested capital. Before trading, you need to ensure you fully understand the risks involved taking into consideration your level of experience and investment objectives. Seek independent advice, if necessary.

سلب مسئولیت:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.