Every country has its own paper or fiat currency which is usually printed and controlled by the national or central bank. This is why forex transactions are important to travelers and for global business transactions. But, with the advent of cryptocurrencies, money becomes digitalized, globalized, decentralized and secured. So, what is a cryptocurrency? It is a digital currency that runs on a network without central control and secured through cryptography. In our world today, it is pertinent for everyone to learn how to trade cryptocurrency because we are in the digital age and digital currencies might be the future.
Bitcoin is the first cryptocurrency that was created in 2009. Bitcoin investment is popular and so it has remained the most traded crypto coin and the biggest by market capitalization. Other coins in the popular cryptocurrency list include Ethereum, ripple, Dashcoin, Monero, etc. Most cryptocurrencies run on their own network known as ‘Blockchain’. The blockchain is a database that is made up of blocks which are records of transactions that run on decentralized peer-to-peer network of private computers called nodes. Each node has a copy of the blockchain. The blocks are interlinked as each block can be traced to the original block. Every transaction is time-stamped, immutable and must be authenticated from several nodes.
Crypto coins are bought and sold via online exchanges. To own a cryptocurrency, you need to store it in a wallet which can be digital, hard or paper wallets. Most early investors, who bought Bitcoin, kept it for a few years and sold later at a profit. Another way of investing in cryptocurrencies is by trading crypto ‘contract for differences’ (CFDs). But, there is absolute need to learn how to trade cryptocurrency CFDs before venturing into it. This is because CFDs are complex instruments and are very risky.
Cryptocurrency Contract for Differences (Crypto CFDs)
Crypto CFDs are contracts that allow the trader to speculate on the price of the underlying cryptocurrencies without ownership of the crypto coins. The prices of the crypto CFDs are derived from the underlying cryptocurrencies in real-time. The trader only predicts the price direction at any given time with the aim of profiting from the price movements. Crypto CFD contracts are usually between an online brokerage firm and a trader. The broker is in charge of trade executions.
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Trading crypto CFDs with 101investing
101investing is an online broker established in Cyprus. It is owned and operated by ‘FXBFI Broker Financial Invest Ltd’ which is a company regulated by the Cyprus Securities and Exchange Commission (CySEC). Crypto CFDs are traded in pairs with the major currencies like BTCUSD, BTCEUR, ETHUSD, LTCGBP, etc. 101investing streams the ‘bid’ and ‘ask’ price of each crypto asset on the MT4 trading platform; where traders place their orders for onward execution by the broker or its liquidity providers.
Below are the steps on how to trade cryptocurrency CFDs:
- Determine the crypto CFD asset to trade e.g. DSHUSD, DSHEUR, BTCUSD, etc.
- Determine the right time to trade and whether to ‘buy’ or ‘sell’. Generally, you buy when you believe that the prices will increase and ‘sell’ when anticipating a declining market.
- Create a new trading account, verify and fund it.
- Download the MT4 trading platform on mobile or desktop. You can also choose the MT4 web trader which runs on web browsers thereby eliminating the need for downloads.
- Launch the MT4 platform and login with your account id and password.
- When the default MT4 screen loads, locate the asset of interest and place the ‘buy’ or ‘sell’ order as predicted from your analysis.
- Monitor the trade and close it whenever you are satisfied with the trade results.
If your prediction is right, you will make a profit. But, if the market moves against your direction, you will suffer a loss. 101investing incorporates its trading fees into the ask-bid spread. Before opening live trades, it is important to learn how to trade cryptocurrency and understand all the terms and concepts associated with it.
Advantages of trading Crypto CFDs
Below are some reasons why people choose to trade crypto CFDs:
High returns on investment potential
The price of most cryptocurrencies is unstable and continues to fluctuate endlessly. This is exactly what crypto CFD traders want so that they can take advantage of the price movements. Traders are required to know how to trade cryptocurrency CFDs by analyzing the markets and then predicting the price directions within a specified time frame. It does not matter whether prices are increasing or decreasing, the crypto CFD market has a potential of high returns.
Round the clock trading
The cryptocurrency market is not regulated and not controlled by any central authority. As a result, the market is always open 24/7 even on weekends and public holidays. This is an advantage to crypto CFD traders because they can trade anytime that is convenient for them without waiting for the market to open.
Leverage trading
Every CFD broker states the leverage allowed on each asset. Leverage trading allows traders to multiply their market exposures and open trade positions that are worth more than the invested capital. For example, the ask price of ETHUSD is quoted as 354.42, so, trading one lot (100 ETH) will require a capital of $35,442.00. But on a leverage of 1: 10, the trader only needs $3,544.20 to open a trade position for 1 lot of ETHUSD. Leverage trading may help a trader to grow his capital faster but it is also risky.
CFDs cannot be lost
Unlike actual buying and keeping of cryptocurrencies, trading crypto CFDs eliminates the need to safeguard wallets and private keys. For example, a research published by Fortune.com estimates that about 4 million Bitcoins are lost forever. Another research published by Bitcoin.com estimates that about 1,500 Bitcoins are lost every day. This is because Bitcoin owners may lose their private keys because of many reasons ranging from system failure, exchange collapse, individual errors and misplacement.
Bitcoin investment as well as investment in other cryptocurrencies require careful storage preferably offline and multiple storage locations without anyone seeing the private keys. On the other hand, crypto CFDs cannot be stolen or lost because it is just a contract that is completed when the trader closes his trade on the broker platform.
Disadvantages
Below are some disadvantages confronting Crypto CFD traders:
High risk
Generally, trading CFDs pose a high risk to the trader’s capital. The crypto CFD market is inherently risky because of it volatile nature. Market reversals are common and when it happens, the trader starts losing because the trade has turned against his position. It is imperative that traders learn how to trade cryptocurrency CFDs using the available risk management tools and strategies. 101investing states it clearly that “between 74-89% of retail investor accounts lose money when trading CFDs”.
Leverage
Even though leverage trading may help a trader to boost his capital and perhaps make more profits, it is generally regarded as ‘a doubled-edged sword’. This is because leverage equally amplifies losses. So, if you are trading on leverage, just know that you are amplifying your losses if the trade reverses. This is why 101investing reserve higher leverages for professional traders. It is necessary to understand how to trade cryptocurrency using leverage because it can make or mar a trader.
Swap fees
These are charges that are incurred when a trader maintains open positions overnight. It is charged in addition to the normal trading fees. If a trader maintains open positions for weeks, swap fees may accumulate and consequently deplete any profits which the trader might have accumulated. The trader is expected to understand how to trade cryptocurrency and also factor in the swap fees and trading fees when estimating his return potentials.
Summary
Cryptocurrencies are virtual currencies that are created, transferred and spent through a distributed network that is secured and encrypted. Since Bitcoin was launched, thousands of cryptocurrencies have followed. Crypto CFDs are an excellent way to invest in cryptocurrencies because it has a high return on investment probability, requires less capital and can be traded on a 24/7 basis. On the other hand, CFDs are very risky because of market volatility, leverage and some other reasons. It is essential to learn how to trade cryptocurrency CFDs and carry out some analysis before placing live trades.
101investing is a regulated broker that offers over 250 CFDs for trading. This includes crypto CFDs in pairs with the popular fiat currencies. Below are some reasons why you should trade with 101investing:
- Tight spreads on all assets without commissions.
- Very fast execution speed; typically less than a second.
- Trading education is provided in form of articles, video lessons and eBooks.
- All trading is via the MT4 platform which is versatile, rugged and loaded with useful trading tools.
- Responsive client support team that can be reached 24/5.
FAQs
Can you make money with cryptocurrency CFDs?
We cannot deny the fact that it is possible to make money by trading crypto CFDs. However, it is extremely difficult and very risky. It requires complete knowledge of how to trade cryptocurrency CFDs, exceptional trading skills, robust trading plan, good money management strategies and discipline.
How long can I hold a CFD?
You can hold a CFD open position as long as you have the margin that covers the trade position. CFDs do not expire but due to swap fees and trading fees, holding CFDs for very long periods might become unprofitable. But, if the trader desires to hold a position for years, the broker will not close the position except when the required margin is depleted and the ‘stop out’ level is reached.
How do CFD providers make money?
CFD brokers make money through various ways which depend on each broker. Generally, most brokers make money by marking up the ask-bid spread which represents the trading fees. Some other brokers charge commissions only. Other ways of making money are:
- deposit and withdrawal commissions
- swap fees
- inactivity fees
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