Trader’s job is to take advantage of opportunities available. Sometimes, there is a totally new market like the cryptocurrency. It was added just a few years ago. A majority of people are still reluctant to trade because they are not aware about its mechanism and consider it to be too risky. Just a little research and you will learn about the potential of CFD trading in this emerging market.
What is crytpocurrency CFD?
Cryptocurrencies are digital currencies or currency on software platforms. Companies or teams behind these cryptocurrencies are creating new currency in the form of software platform, which acts as medium of exchange. It is just like other platforms people use.
For example, Windows is a software platform used on personal computers and dollars [or local currency] are paid to buy the license to use this platform on your computer, where database is stored. Similarly, cryptocurrency replaces the dollar [or local currency] that is used to purchase these software platform and database offered is on the basis of blockchain technology. Cryptography is employed to track the transfers and purchases depending on World Wide Web to warranty their value and approve the transactions.
CFD [contract for difference] is an underlying asset contract based on different instruments like share, index, currency or commodity. In a CFD transaction traders just speculate whether the underlying asset’s value will rise of fall. They don’t own the physical asset but just the price predictions. However, for every point moving in your favor means multiple payment on the number of units you sold or bought.
Cryptocurrency CFD means you forecast future changes in prices of specific cryptocurrency pairs. Usually, crytpocurrencies are related with US dollars but some brokerage platform offers crypto versus crypto. Common cryptocurrencies available for trading are BTC [bitcoin], LTC [Litecoin], ETH [Ether], XRP [Ripple], and BCH [Bitcoin Cash]
If you believe that the cyrptocurrency value will increase then go long [buy] and if you feel it will fall down then go short [sell]. You are empowered to earn profits in both increasing and dwindling markets.
The key concept to understand before you venture into cryptocurrency CFDs is the ‘leverage’. It is a key to enjoy benefit as well as a way to experience undesired losses. For example, for opening a position you need is small percentage of trade’s total value. It is anything between 3% – 20% and is called the ‘margin requirement’. You opened a position worth $10,000 with 5% margin requirement. It means you need to deposit just $500 but the gains will be 100% if your speculation for the movement is correct.
Alternatively, margin trading also increases the chances of experiencing magnified loss, which gets calculated on full position value. This means you can end up losing significantly more than the margin deposit. So, remember this risk before opening a crypto CFD position.
Buying & holding cryptocurrency vs. CFD crypto trading
Cryptocurrencies are bought and sold through cryptocurrency exchange platforms [centralized or decentralized]. Digital or fiat currency is used to buy preferred crypto coins, which are held for some time with a hope their price will increase in future and you can sell them for profit.
However, through CFDs you can avoid security risk related with trading on exchange platforms as you will be more involved in price prediction rather than actually owning any crytpocurrency. It is a straightforward way to benefit from prediction of both – increase or decrease in asset price but the potential of higher rewards accompanies increased risks.
Both options in right circumstances can possibly provide good results but if things go wrong you can suffer considerable losses. Ultimately, the choice depends on personal preference and trading style.