CFDs better known as certificate of difference are popular with trading derivatives of the underlying asset. This allows brokers to offer very high leverage on their trading products. These products have been popular among commodity, forex and indices traders over the years. However, it’s important to note that CFDs trading products carry high risk.
CFDs allow investors to make profits whenever there are changes in the prices of the underlying asset without actually having to own the real asset. In this case, investors are merely using their judgment to decide whether their prices will surge or dip.
The exciting thing about CFDs is that they allow individuals to make profits when the prices of the underlying asset rise and even when they fall. But, unlike futures contracts, CFDs don’t trade on various exchanges and are usually illiquid.
As for positions, a CFD position can either be short or long. So, when one takes a long position, it means they expect the value of the underlying asset to increase over time. But, if the same person is to take a short CFD position, it says they hope to profit from a fall in the price of the underlying asset.
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What Are Bitcoin CFDs?
A Bitcoin CFD can be defined as a bet between an individual and the broker. It allows the individual to speculate on the change in the price of the crypto coin. Imagine an individual that feels the price of BTC will increase, so they go ahead and open an account with a CFD broker, and they go long on then Bitcoin CFD.
If the price of Bitcoin increases as they had predicted, the individual will win the bet against the broker. However, as we mentioned in the introduction, CDFs are highly risky. Add the volatility of cryptocurrencies, and you see why Bitcoin CFDs are incredibly high risk, and they aren’t suitable for newbies. It’s always advisable to invest in them when you have a complete understanding of the danger they carry along.
A Few Places Where Individuals Can Trade CFDs
AvaTrade was founded in 2006 and offers investors access to forex options and CFDs on some asset classes including cryptocurrencies. The central bank of Ireland regulates the firm. In 2011 the company made a significant investment by acquiring Finotec Trading UK limited and Japanese Forex broker Art Co.
The company has also won many prizes for its customer support and security of funds excellence. Between 2009 and 2016 the company won five prestigious awards. AvaTrade allows individuals to deposit funds using credit cards, eWallets, bank wire transfers, etc. The accepted eWallets include WebMoney, Neteller, and DinPay.
eToro was founded by two brothers Yony and Ronen back in 2007. The social trading platform has registered offices in Cyprus and the UK. So far, the platform has managed to garner over 5 million users from over 170 countries.
This platform is newbie friendly and can help them learn fast how to trade CFDs from more seasoned traders. Since its launch, the firm has managed to raise over $60 million in funds. Its services are global, and the firm has been licensed to operate in the EU, UK, and Israel.
This is one of the most reputable brokers around today. The firm has been approved by the FCA and its listed on the London Stock Exchange (LSE). It’s suitable for professional traders who plan to start trading Bitcoin CFDs. One of its advantages is that it offers negative balance protection compared to other platforms.
It’s a great deal for investors as they cannot lose more money than they have deposited. As for topping up your Plus500 account, this can quickly be done through credit cards and Skrill.
Markets.com was launched in 2010 as GFC Markets before merging with TradeFX. It’s also a subsidiary of the Playtech – a company that has been listed on the London Stock Exchange since 2012. Markets.com has a market cap of over $2.5 billion, and it’s fully regulated in Cyprus. The company caters to both forex and Bitcoin CFD traders.
Individuals can deposit funds in their accounts through credit and debit cards, Neteller, Skrill, PayPal, and Wire Transfers. Wire transfers usually take longer than e-payment systems before one sees the funds have been deposited on their account. Interestingly, both deposits and withdraws on the platform don’t cost anything.
Advantages of Trading Bitcoin CFDs
The main advantage of Bitcoin CFD is that individuals can buy using margin. This means trades can be done using borrowed money which is great for the traders as they can open a large position even when they just have a small amount of deposit. Let’s imagine the case of an individual that wants to buy BTC worth $3000 and only has $500 available. Through margin trading, they can borrow an additional $2500.
In case the price of BTC increases to $5000, the individual will be able to liquidate and refund the lender the $2500 borrowed. As a result, the individual will have a profit of $2000. Also, since the individual doesn’t own any underlying assets, they don’t have to worry about their Bitcoin wallets getting hacked.
The other main advantage of Bitcoin CFDs is that they allow individuals to profit both when the underlying asset increases and falls in price.
Disadvantages of Trading Bitcoin CFDs
The main problem of Bitcoin CFDs is that they are highly risky. It’s strange given that this is what makes them also highly rewarding. Leverage ensures losses are amplified similarly as profits. There is always a possibility of losing everything that you have invested when the market goes against you, and this can see your margins fall beneath the agreed levels.
Also, an individual has to pay overnight fees every day until their position is closed. Remember the individual doesn’t even own the underlying asset, and they only speculate on price fluctuations.
Finally, there is a risk of overtrading. When an individual loses money, they may be tempted to overtrade so that they can recover their losses which is a bad idea since they could end up getting stuck in a losing rut.