What are Crypto CFDs? | A Guide to Trading CFDs

By Ehis Ohiwerei

Key Takeaways

  • CFDs are a type of financial product that can be accessed through online platforms. They are used for speculating on the price movements of assets, but they can be pretty complex.
  • Cryptocurrencies are a type of asset that can be traded using CFDs. This means that you can take a position on whether the cryptocurrency’s price will rise or fall without owning any cryptocurrency.
  • Cryptocurrency is a volatile asset that can experience sudden and significant price fluctuations. It’s essential to have a good understanding of the risks involved before trading.
  • If you want to trade cryptocurrency, you can do so through various channels. You can buy and sell directly through exchanges or use financial products like ETFs, futures contracts, or CFDs.
  • Although CFDs and ETFs are both derivatives, they differ in many ways. While they share some similarities, they are distinct from one another.

What are Crypto CFDs?

A contract for difference (CFD) is a financial tool used in finance. A crypto CFD is a specific contract that permits traders to profit from the price difference of a crypto coin between opening and closing a position. CFDs are a type of derivative, which means you can speculate on the movement of cryptocurrency prices without owning the coins. By taking a long (‘buy’) position, you can profit from a price increase, or by taking a short (‘sell’) position, you can profit from a price decrease. It’s important to note that leveraged trading can boost your gains and increase your losses.

How Do Crypto CFDs Work?

Crypto CFDs involve traders speculating on the direction of a digital currency, and a small deposit of the asset’s value is required as security for the trade. Cryptocurrency can be traded in pairs, making it possible to speculate on the value of a cryptocurrency pair. To open a CFD position, you will need to select the number of contracts (the trade size) you want to buy or sell. Your profit will increase with every point the market moves in your favor, but there is also the risk of loss if the market moves against you. Here is a list of coin pairs that CFD allows you, as a user, to speculate on:

  • BTC/USD
  • BCH/USD
  • ETH/USD
  • XRP/USD
  • LTC/USD
  • BTC/ETH

Buy

Assuming that an asset’s price will increase, you can open a long (buy) position, enabling you to make a profit if the asset’s price rises as you anticipated. However, if your prediction is incorrect, you risk incurring a loss.

Sell

Assuming that an asset’s price will decrease, you can open a short (sell) position, enabling you to make a profit if the price falls by your forecast. Nevertheless, if your prediction is incorrect, you could end up with a loss. Although there are only a few trading pairs, it is possible to earn a profit. It’s best to start with one or two trading pairs when you first begin CFD cryptocurrency trading until you become more familiar with the process.

What is a CFD Account?

With a contract for difference (CFD) account, you can utilize leverage to trade on the price difference of various underlying assets. Leverage means you only have to provide a portion of the funds necessary to trade, which is the deposit margin. The maintenance margin, on the other hand, must be covered by equity, which includes the account’s balance, including unrealized profits and losses. The maintenance margin varies based on the assets you are trading, and your account’s equity must always be sufficient to cover the maintenance margin to keep your positions open, particularly in the event of running losses. Before offering you margin trading, your broker must learn a bit about you. They will request that you set up an account, verify your identity, and provide evidence of your ability to cover losses.

How Do Traditional CFDs Work?

When trading with a CFD, the process usually works like this:

  • First, traders select an asset the broker offers as a CFD, such as a stock, index, or currency.
  • Next, they open a position and set parameters such as whether it’s long or short, how much to invest, leverage, and other settings depending on the broker’s options.
  • Once the trader agrees to the terms, a contract determines the opening price and any additional fees that may apply.
  • The position stays open until the trader chooses to close it. It is automatically closed due to reaching a Stop Loss or Take Profit level or the contract expiration.
  • If the trade is profitable, the broker pays the trader. Still, the broker charges the trader the difference if it results in a loss.

What is the Difference Between CFDs and ETFs?

CFDs and ETFs are two types of financial instruments, and although they have some similarities, they have distinct differences. Both are derivatives, meaning you don’t own the underlying asset directly. Financial institutions create ETFs, aggregating various financial assets into one instrument. At the same time, CFDs are contracts between a trader and a broker, allowing private users to access them. You can create a diversified portfolio and manage your risks with CFDs and ETFs. Investors and crypto enthusiasts have high expectations for upcoming ETFs, such as Bakkt, as they could offer new investment opportunities.

What are the Benefits of Trading Cryptocurrencies CFDs?

When you trade CFDs, you exchange the difference in the price of a cryptocurrency or any other asset between its opening and closing positions. Trading CFDs has several advantages, including:

Better liquidity:

CFDs have better liquidity than cryptocurrencies. If you trade an altcoin, you will need to switch to BTC and withdraw through an offline ATM or an exchange, which can be costly. However, you can withdraw your funds directly in fiat currency without conversions with CFDs.

Lower security risks:

Trading CFDs is safer than buying cryptocurrencies from an exchange. Using a registered broker protects against loss of funds or fraudulent practices such as security hacks.

Continuous trading:

Trading cryptocurrencies can be done 24/7, as no centralized governing authority exists. Transactions occur directly between individuals on cryptocurrency exchanges worldwide. However, infrastructure updates or forks may cause periods of downtime. Traders can even trade cryptocurrencies against fiat currencies such as the US dollar.

No need for a digital wallet:

Trading cryptocurrency CFDs does not require a digital wallet or registration with an exchange. Traders don’t need to worry about keeping digital currency safe because they don’t hold it.

What are the Risks of Crypto CFDs?

We have some concerns regarding the use of CFDs and cryptocurrencies, which include:

Price volatility:

Cryptocurrencies and CFDs linked to them are highly volatile and susceptible to rapid price changes caused by unexpected events or changes in market sentiment. The value of specific cryptocurrencies can decrease by more than 30% in a single day.

Leverage:

Some firms offer high leverage, up to 50:1, which can increase profits and losses. This also affects the fees charged by the firms and the risk of losing more than the initial investment.

Charges and funding costs:

Fees for CFDs linked to cryptocurrencies are typically higher than for other CFD products. These fees include the spread, funding charges, and commissions. It is essential to consider the impact of these fees on your potential profits, as they can vary significantly between firms.

Price transparency:

Cryptocurrencies used to determine the value of your CFD position can have significant price variations compared to traditional currencies. This increases the risk of not receiving a fair and accurate price for the underlying cryptocurrency when trading.

It is important to note that investing in CFDs and cryptocurrencies should only be considered by experienced investors with a thorough understanding of financial markets and the associated risks.

What is Margin in Cryptocurrency Trading?

Margin is a fundamental aspect of leveraged trading. Essentially, it refers to the initial deposit you must put up to open and sustain a leveraged position. If you are trading cryptocurrencies on margin, it is essential to note that your margin requirement will vary depending on your broker and your trade size. The margin is generally expressed as a percentage of the total position. For instance, opening a position on Bitcoin (BTC) might require you to pay only 10% of the total value of the trade, meaning you would only need to deposit $500 instead of $5000.

What is a Pip in Cryptocurrency Trading?

Pips are used to track the price movement of a cryptocurrency and refer to the smallest unit of change in price at a specific level. Popular cryptocurrencies are generally traded at the dollar level, meaning that a movement from $190.00 to $191.00 would represent one pip. However, lower-value cryptocurrencies may be traded at different scales, where one pip can be a cent or a fraction.

How to Trade Crypto CFDs

If you’re interested in trading CFDs on cryptocurrencies, there are a few straightforward steps to get started:

  • Find a reputable CFD broker: Take the time to research and choose a CFD broker that has a good reputation and offers the features you need, such as leverage options, regulatory licenses, trader protection measures, spreads, and fees.
  • Open your account: After selecting your broker, you must create an account with them. This usually involves filling out an account opening form and completing KYC verification. You can sign up with INFINOX easily and quickly here.
  • Develop your cryptocurrency trading plan: To guide your decision-making and help manage risks, creating a solid trading plan is essential. You should include all the risk management measures necessary.

Once you’ve completed these steps, you should be ready to begin trading cryptocurrencies with CFDs.

What Moves the Cryptocurrency Market?

Supply and demand forces determine cryptocurrencies’ value in their respective markets. Unlike traditional currencies, cryptocurrencies are decentralized, making them less susceptible to economic and political factors. However, there are still several factors that can impact the price of cryptocurrencies, including:

  • Supply: The total number of coins available and how quickly they are released, destroyed, or lost. Additionally, market capitalization – the perceived value of all coins in circulation – can affect prices.
  • Publicity: How cryptocurrency is portrayed in the media and how much attention it receives. The ease of integration with existing infrastructure, such as e-commerce payment systems, can also impact prices.
  • Significant events: Major events such as regulatory updates, security breaches, and economic setbacks can substantially impact cryptocurrency prices.

Final Thoughts on Trading Cryptocurrency CFDs

CFDs can be a powerful tool to profit from market volatility. However, it is crucial to understand the potential risks involved before you start trading. Understanding the market and carefully choosing a trustworthy and regulated broker is vital. Additionally, you should only invest what you can afford to lose, even if the investment appears to be lucrative. If you can effectively manage the risks associated with CFD trading, the potential rewards may make it worthwhile.

Frequently Asked Questions

What's the Difference Between Crypto and Crypto CFD?
Cryptocurrency CFDs allow traders to speculate on the price movements of cryptocurrencies without actually owning them. This is popular among those who want to avoid dealing with the technical aspects of buying and storing cryptocurrencies but want to take advantage of their price fluctuations.
What are the Benefits of Crypto CFD?
CFD trading is a leveraged product that allows you to open a position on 'margin' - a deposit worth only a fraction of the trade's total value. In other words, you can gain significant exposure to the cryptocurrency market while only tying up a relatively small amount of your capital.
Is CFD Trading Just Gambling?
You should never trade with money you can't afford to lose. Still, CFDs are different from gambling because they require a degree of skill, knowledge, and experience to achieve the best results. Unlike gambling, CFDs aren't purely based on luck.
Can you Make a Living From CFD Trading?
Yes, it's possible to make money with CFD trading. However, it requires honing your trading skills, discipline, practice, and patience to do well in the market.
What are Crypto CFDs?

What are Crypto CFDs?

By Ehis Ohiwerei - min read
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