A CFD is a contract where you agree to swap the difference in a cryptocurrency’s price from when you first open your place to the moment you close it. You guess about the market price, rather than taking control of the cryptocurrency. If you open a long position and the value of the cryptocurrency rises, you will profit, but if the price decreases, you will make a loss-the same is true for a short position.
When trading cryptocurrencies, you bet about whether your chosen market would grow or fall in value, without ever taking possession of the digital asset. This is accomplished by the use of derivatives such as CFDs.
While the cryptocurrency market is relatively new, due to massive amounts of short-term trading activity, it has experienced considerable volatility. For example, the price of bitcoin rose as high as $19,378 between October 2017 and October 2018 and fell to lows of $5851. Some cryptocurrencies were comparatively more secure, but sometimes emerging innovations draw investor attention.
Cryptocurrencies uncertainty is part of what makes the business so exciting. Rapid moves in intraday rates can provide traders with various opportunities to go long and short but often come with increased risk. So if you plan to enter the market for cryptocurrencies, make sure you’ve done your homework and built a strategy for risk management.
Typically the cryptocurrency market is open for trading 24 hours a day, seven days a week, because there is no centralized market regulation. Cryptocurrency purchases take place on cryptocurrency exchanges worldwide, directly amongst individuals. However, as the market responds to infrastructural changes, or ‘forks,’ there can be maintenance times.
Liquidity is the measure of how fast and simple it is to turn a cryptocurrency into cash, without affecting the market price. Liquidity is important because it leads to better pricing, quicker transaction times, and improved technical, analytical accuracy.
The cryptocurrency market is commonly considered illiquid since the transactions are distributed through several exchanges, which means that comparatively small trades can significantly affect market prices. That’s part of what makes cryptocurrency markets so unpredictable.
You purchase the asset upfront when you purchase a cryptocurrency in the hope it will increase in value. But when you trade on a cryptocurrency’s value, you can take advantage of, as well as increasing, stock-decreasing markets. This is known as shorting.
For instance, let’s assume you’ve decided to open a short CFD position on ether’s price because you think it will fall. If you were right, and ether’s value dropped against the US dollar, your trade would be profitable. However, if the value of ether increased against the US dollar, it would make a loss for your place.
Since CFD trading is a leveraged commodity, it allows you to open a ‘margin’ position – a deposit worth just a fraction of the full value of the trade. In other words, though tying up just a relatively small amount of your money, you might obtain broad exposure to a crypto-currency market.
The profit or loss you make from your cryptocurrency trades will represent the full value of the position at the point it is closed, so margin trading gives you the chance to make big profits from a relatively small investment. However, it may also intensify any losses for a particular transaction, even losses that may surpass your initial deposit. For this reason, consideration of the overall value of the leveraged position before trading CFDs is important.
It is also necessary to ensure that you have in place an appropriate risk management plan, which should include the required stops and limits.
You would need to buy and sell cryptocurrencies from an exchange that needs you to build an exchange account and store the cryptocurrency in your digital wallet. The process can be time-consuming and restrictive. With CFD trading, your single account allows you to trade cryptos and many other markets, and it is stored in the currency of your account as opposed to bitcoin formats.
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