When you want to trade cryptocurrencies, there are only two ways to do it. The first is the most common where you find a cryptocurrency exchange and buy the virtual currency you like. The exchange can either be land-based or even online, it doesn’t matter. All that matters is that in the end, you have actual cryptocurrency in your virtual wallet. The other way to trade cryptocurrencies is in the form of CFDs. In this case, you don’t actually own any cryptocurrencies, instead you only track the value of certain cryptocurrencies.
How cryptocurrency CFDs work
CFDs (Contracts for Difference) are financial instruments that track the value of an asset from the time the trade is opened until it’s closed. With cryptocurrency CFDs, therefore, the value of a specific cryptocurrency is noted when you open a trade until the trade is closed. You’re not buying anything, but merely checking the price difference.
To access cryptocurrency CFDs, you’re going to need a broker, and there are quite a few of them who offer this product. Your broker is going to track the value of the cryptocurrencies from an exchange, and then track your trade accordingly. For example, the value of bitcoin as of this writing is $4,360 on the Coindesk exchange. If your broker tracks your cryptocurrency CFD trades from this exchange, that is going to be your entry price, if you made a trade. Now let’s assume that the value of bitcoin rose to $4,500 within a day, your broker would calculate the difference, $140, and that would be your profit.
You might be asking yourself, so what does the broker have to gain from this? Well, they make a profit from the spread, just like they do with forex trading. So, in our case above, the ask price you would receive from your broker would more likely be higher than $4,360, perhaps $4,362. At the end, when do close the trade, your broker would use a lower bid price, say, $4,498. This way, they get to make about $4 from your trade, even though you didn’t actually buy any cryptocurrencies.
The $4 difference would be the bid/ask spread, and that’s going to be the broker’s profit. It may seem small, but considering how many traders participate every single day, the profits add up. There’s one slight caveat, though, when trading cryptocurrency CFDs, and that’s in which exchange your broker uses to track the value of a cryptocurrency. There are very many exchanges around the world, all with slightly different quotes, so you need to identify the broker with the best quotes.
Good brokers that offer cryptocurrency CFDs like Trade.com will identify the best exchanges around the world to ensure their clients get the best quotes all the time. You should definitely check Trade.com reviews here and see how they manage to fulfill all their clients’ wishes by identifying the best quotes. Besides, the broker offers a free trading platform to trade the CFDs on, instead of relying on web-based platforms only, although they’ve got that too. And for regular traders, all other financial assets are available from forex to stocks, commodities indices and lots more.
What are the advantages of cryptocurrency CFDs?
There are several reasons why one would prefer to trade cryptocurrency CFDs over the actual cryptocurrencies at an exchange, but the main one is leverage. As mentioned before, the current price of bitcoin is around $4,360, and you would need that much money to purchase a single bitcoin. Of course, you can buy less, bitcoin, for example, can be subdivided into many decimal points, but the profit is also smaller. With leverage, you can buy a whole bitcoin worth $4.360 with only $436 if you get a 1:10 leverage, yet your profits will just be the same ($160) as if you had invested $4,360.
Another advantage is that cryptocurrency CFDs are a lot easier to access as long as you find the right broker. You won’t have to go through the hassle of finding the best exchange to trade cryptocurrencies, as your broker will have all this covered. There is also added security with CFDs since you don’t own any cryptocurrencies. Hackers are always trying to hack into people’s virtual wallets, plus you can very easily lose your private key and your bitcoin. None of these risks can be experienced with cryptocurrency CFDs.
If you’re more of a speculator than an investor, then cryptocurrency CFDs are the way to go.