Trading derivatives is definitely gaining popularity among cryptocurrency traders, and in accordance with the trend, so do Contracts for Differences (CFDs). While it is somewhat similar to classical ETFs (Exchange Traded Funds) contracts trading, CFD has significant differences that set them apart.
While ETFs are formed by financial organizations, a CFD is offered by a certified and monitored broker to enable access to these instruments to private users.
In order to introduce you to the nature of CFDs, this article is going to dissect all the aspects of this trading product originally used on Forex.
What is CFD trading?
CFDs enable traders to use changes in the price of a cryptocurrency without owning or physically purchasing the asset. It is useful for traders who do not want to get into technical aspects of owning cryptocurrencies, such as setting up wallets, backing up keys, etc. This benefits user in a way that he can acquire crypto effortlessly at exchange prices.
Trading CFDs allows you to gain more from broad swings in either direction because you are buying or selling an asset at the market price. A buyer and seller consent to settle any discrepancy as prices rise or fall in cash.
Are Bitcoin CFD regulated trading instruments and regulated brokers?
Bitcoin CFDs do allow traders to use leverage (margin). However, contrary to other kinds of Bitcoin derivatives, CFDs mostly limit leverage at 2:1, which means that a trader can invest $2000 in a contract even if he owns only a half of that sum.
What crypto and Bitcoin CFD brokers are there?
Sometimes we refer to brokers as exchanges, and those two, in this case, really mix as brokers whom you can sign a trading contract with are indeed forms of cryptocurrency exchanges, also.
When CFDs are concerned, there are a few best platforms which we are going to name and discuss their features:
This is a company, subsidiary of Playtech, regulated by Cyprus’ authority, CySEC. Bitcoin is not the only CFD they are offering for trade, but it is the only one which, unfortunately, cannot be traded with leverage. The spread for BTC is $50, and contract trading sessions last for approximately a day. Markets.com is a liquid platform with a market cap of around £2.5 billion at the time of writing.
Plus 500 is FCA approved, which means that it is one of the most trustworthy Bitcoin CFD brokers in the market, and is listed on the London Stock Exchange (LSE). This platform also has no additional trading fees, while traders can use a leverage of up to 2:1. As one of its most advanced features, Plus500 offers insurance which secures that traders don’t end up losing more than they have initially invested.
Regulated by the UK, Cyprus, and Australian authorities, eToro is one of the most formidable Bitcoin derivatives broker company. It has a minimum deposit amount set at $200 and, contrary to Plus500, enforces trading commissions on its users.
SimpleFX is a CFD exclusive trading platform registered in Saint Vincent. It also has negative balance protection to prevent users from spending more than they have originally invested. Also, as a huge upside of the platform, let us state that the maximum leverage for BTC trading is 5:1, which is more than other brokers allow. SimpleFX doesn’t charge any deposit or withdrawal fees. When asked about brokerage license, they state that they operate since 2014, and that they “are making all efforts to acquire the license but due to the fact that they offer cryptocurrency accounts, the whole process is stretching over a long period of time as the institutions do not comprehend the whole process of cryptocurrencies.”
This platform is regulated by no less than six regulatory bodies and segregated accounts, which is marketed to make your investments s safe s they can be. Regarding the leverage in BTC trading, Avatrade offers a leverage of 2:1, which falls in the same league with other platforms. Another good thing is that Avatrade offers one among the narrowest spreads for Bitcoin CFDs, making it possible to open a position with 0.01 to 0.005 BTC.
Crypto CFD trading vs margin/leverage trading
Leverage cryptocurrency trading is, of course, not limited to CFDs. Crypto can be physically traded with leverage on many other trading platforms.
However, compared to physically owning Bitcoin and leverage trading it, CFDs bring an even higher amount of risk in the game since the possible losses can be caused by the leverage as well as by the contract going the wrong way for the investor.
Anyhow, any form of trading with leverage should be reserved for those who are well aware of all the risks connected to the strategy, and who possess enough needed knowledge to lower those risks to the minimum.
Crypto CFD trading Pros and Cons
- You don’t have to own BTC to trade it
- No need for any form of technical knowledge needed to store BTC
- CFDs are traded in a highly regulated environment
- Can be utilized for profits in unfriendly market conditions
- Can be traded with leverage
- You don’t own the traded Bitcoin
- Very high level of risk
- Require a high level of knowledge
- Most brokers only offer 2:1 leverage
- CFDs have an expiry date
- Taxes have to be paid for all profits
Disclaimer: Note that this is not investment advice. Cryptocurrencies are highly volatile and very risky speculations. Please, consider consulting an investment professional before investing. Never invest more than you can afford to lose. Do not borrow funds to invest. and