Trading Crypto CFDs: What, Why and How
Crypto CFDs let traders easily trade the booming crypto market. Traders can speculate on the prices of different coins without physically holding the asset.
When it was launched in 2009, Bitcoin (BTC) was the first of its kind. But since then, the crypto space has welcomed thousands of alternative crypto coins, or ‘altcoins’, into circulation. It has also given rise to a range of crypto trading products, including crypto CFDs.
Crypto CFD trading is an opportunity for retail traders to trade a market that has taken the global financial system by storm, but has also become expensive to access. Traders can speculate on the price movements of different coins without physically holding the asset in a crypto wallet. Find out why this makes a difference to your trading strategy.
This article at a glance:
- Crypto is a virtual decentralized, built using cryptographic and blockchain technologies.
- Some see cryptocurrencies as an alternative to the often inaccessible traditional financial system.
- It is possible to trade crypto directly through exchanges, or by trading ETFs, futures contracts or CFDs.
- Crypto is a highly volatile asset, and it is important to be well-informed about the risks involved.
What is crypto?
Crypto is a virtual decentralized currency. Unlike fiat currencies such as USD or JPY, crypto is not built into the traditional financial system. This means that they are more or less free from government or central bank control (although this is now beginning to change).
Crypto is built on two core technologies. The first, cryptography, helps to anonymize and secure transactions. And secondly, blockchain technology is used to store the transaction history of these coins.
Blockchain is a digital public ledger technology that, like cryptography, is also independent of central authorities. Think of it as independent blocks that store information, and are linked to one another. The data stored on these blocks are immutable, or tamper-proof.
It’s important to note that this does not mean that crypto assets are not susceptible to cyber hacks and scams. These attacks can and do happen, to the tune of millions of dollars in stolen cryptocurrency.
While Bitcoin (BTC) is the original cryptocurrency, a number of other coins have also gained prominence. Ethereum (ETH), for example, uses ‘smart contracts’ to run programs – such as payments – when predetermined conditions are met.
Elsewhere, meme coins (coins stylized after Internet memes) have also garnered significant attention from retail traders. Dogecoin is a prime example, with billionaire tech founder Elon Musk’s regular social media commentary on the coin often sending its price swinging wildly.
Speculators and early-stage investors have also been drawn to decentralized finance (DeFi) products that provide a fully digital and decentralized financial infrastructure. Using DeFi, it’s possible to lend cryptocurrency and earn interest in a matter of minutes.
How did crypto become so popular?
Crypto took some time to gain a foothold in global markets. This is because the novelty and volatility of Bitcoin and other cryptocurrencies reinforced the beliefs of critics who refused to believe in its future.
Fun fact: Crypto owner Laszlo Hanyecz paid 10,000 BTC for two takeaway pizzas in May 2010. Today, that would have cost him upwards of 3 billion USD.
The benefits of decentralization, cheaper fees and ease of use, however, persisted. Crypto payments are cheaper and faster to process, both for the end-user and business owners. For instance, the e-commerce industry increasingly accepts transactions in cryptocurrency, while some retailers now permit the use of cryptocurrency via mobile-based crypto wallets.
Some consumers are also on board with the fact that cryptocurrencies are wholly decentralized, and unlinked from world governments. This allows cryptocurrencies to remain accessible even in the face of economic or political instability.
Is crypto an actual currency?
Cryptocurrency is viewed in some countries as a credible alternative to the traditional financial system – a system that’s not always accessible to all. Crypto enthusiasts believe it can bridge the financial services gap, giving unbanked consumers the ability to receive and send money.
Although cryptocurrency does not offer physical coins or notes, some nations have recognized cryptocurrencies as legal tender. El Salvador was the first to pass legislation to enable Bitcoin to be used as legal tender, joined more recently by the Central African Republic.
What is crypto trading?
Like other financial instruments such as stock or fiat currencies, crypto is also a tradable asset.
You can buy and sell underlying crypto coins through exchanges such as Binance or Coinbase.
Alternatively, you can also speculate on the price movements of those same underlying crypto assets, but crucially, without having to physically own and store them. Crypto CFDs allow you to speculate price movements and take advantage of the difference between their opening and closing prices.
Here’s what you need to know about trading crypto assets versus crypto CFDs.
Advantages of crypto trading
- Many leading crypto exchanges are fully decentralized, with no centralized governance. This allows buyers and sellers to interact quickly across the globe, but often lacks regulatory oversight.
- As a crypto trader, you instantly become an investor in one of the fastest-growing industries on the planet. Just five years ago, crypto’s market capitalization peaked at just over 773 billion USD in January 2018. In November last year, it surpassed the 3 trillion USD mark.
- Trades on cryptocurrency exchanges are highly secure, as they are secured by cryptographic measures, with transaction data protected within the blockchain network.
Disadvantages of crypto trading
- The inherent volatility in the crypto markets – due largely to the sector’s immaturity – presents real dangers to crypto trading beginners. Without adequate risk management, wild price swings can quickly ruin profitable positions.
- The most established cryptocurrencies, like Bitcoin, require deep pockets to invest in. The price of a single Bitcoin has fluctuated anywhere between the 35,000 USD to 48,000 USD range this year so far.
- If you decide to trade cryptocurrencies using a crypto exchange, you will need to invest in hot or cold crypto wallets to store your assets. Hot wallets (or digital wallets) present security risks, as the private keys to your wallet address are susceptible to hacks. Cold wallets are hardware devices that store your unique private key. They are more secure, but if you lose your private key, you can say goodbye to your crypto assets as you won’t be able to retrieve them.
How to trade crypto?
There are multiple avenues to trade cryptocurrencies today:
- Crypto exchanges
You can buy and sell cryptocurrencies directly on crypto exchanges. These match buyers and sellers in real-time at mutually acceptable prices. The main benefit of trading crypto in this way is that you own the underlying crypto coins. The coins you hold are housed either in a digital or hot crypto wallet, or a separate hardware, or cold, wallet.
- Crypto ETFs
If you're new to cryptocurrency investing, you may wish to invest in a crypto exchange-traded fund (ETF). Managed by investment companies, this is a fund that tracks the price of a single coin, or a basket of different coins. It offers a low barrier to entry in terms of trading fees, and frees investors from having to own the coin itself.
- Crypto futures
Crypto futures give you the ability to speculate on the future price of a crypto asset, without having to own and store it. Traders enter into agreements to buy or sell a coin at a fixed price in the future. They make a profit or loss depending on which way prices move on the maturity date of the agreement.
- Crypto CFDs
CFDs are financial contracts that allow traders to speculate and trade the prices of different instruments, without having to outrightly buy or sell the underlying instrument. Similar to ETFs, they have no requirement for wallets since traders don’t actually hold the crypto assets. Traders can decide which coins they would like to trade, and can benefit from access to leverage as well.
What are crypto CFDs?
Crypto CFDs operate in the same way as other CFDs. Traders speculate on the price movement of a coin, and accordingly choose to go long or short. When they go long, they buy the asset from a CFD broker with the intention of selling it back. If the price of the coin rises at the time they sell, they make a profit. If not, their trade results in a loss.
Similarly, when they short a coin, it means that they sell it to the broker in the hopes that the price will fall by the time they buy it back. If it does, it works out well for them by way of a profit.
Retail traders never take physical ownership of the assets they buy and sell. They only make profits or losses based on the underlying asset’s price movements. At the same time, unlike ETFs which are managed by fund managers, CFDs give traders the liberty to pick and choose what coins they would like to trade.
Crypto CFDs explained
- When you trade crypto CFDs, you can go both long or short in the market. This means that you can trade crypto no matter which direction it moves in, and benefit from price volatility, without having to buy the coin itself.
- Crypto CFDs can be traded using leverage. Your CFD broker will lend you capital in specified ratios to amplify your buying or selling power. For instance, trading with 5:1 leverage means that you can get access to five times the amount of capital than is currently in your trading account. This also magnifies risk, so adequate risk management measures should be put in place.
- Some crypto CFD brokers will give you the crucial benefits of regulated services, whereas even well-established cryptocurrency exchanges battle to be legally recognized.
- There’s no need for a cryptocurrency wallet since you never own the underlying asset. This means you don’t have to worry about losing your private key, or paying for wallet usage.
- Volatility in the cryptocurrency markets is unrivaled. Traditional assets like commodities and even most established equities rarely experience price moves of 1% or higher in a single day. With cryptocurrencies, prices can rally on crash within a 24-hour window. This extreme volatility does present lucrative short term opportunities, but can also result in significant losses. Traders are advised to tread cautiously and actively manage risk.
How to trade crypto CFDs
- Choose a reputable cryptocurrency CFD broker: Find a CFD broker you can trust with your crypto trading funds. Check their leverage options, regulatory licenses, trader protection measures, spreads and fee structures, so you have a clear idea of what to expect.
- Create your client account: Open your account with the broker of your choice. This will usually involve completing an account opening form, and sending your documents for KYC verification. INFINOX makes this process quick and easy, sign up here.
- Create your crypto trading plan: Build a trading plan to support your decision-making, and be sure to include all required risk management measures. To learn how to do this, read our explainer on building a trading plan.
With all this in place, you should be ready to start your crypto CFD trading journey.
Crypto CFDs FAQs
What are crypto CFDs?
A crypto CFD, or crypto contract for difference, tracks the price of the underlying crypto asset you 'buy' or 'sell’. Here, you're only trading the price, not the asset itself. You make a profit when the value of the underlying crypto asset moves in your favored direction, and a loss when it moves against your position.
Why should I trade crypto CFDs?
Trading crypto CFDs is a chance to speculate on the value of crypto assets without having to hold these coins outright, invest in a crypto wallet, or pay related fees. Unlike ETFs, you also have the freedom to trade the prices of any coins of your choice.
Can I find regulated brokers to trade crypto CFDs?
Yes, you can trade crypto CFDs via regulated brokers, depending on your region.
Does the crypto CFD market close overnight?
No. One of the big advantages of trading crypto CFDs is that they are available 24/7, 365 days of the year. Cryptocurrencies are traded across multiple exchanges, all of which are open day and night, unlike conventional exchanges that close at the end of the afternoon trading session.
What does margin cryptocurrency trading mean?
Trading crypto CFDs on margin requires you to leverage your trade by taking a loan from your CFD broker to magnify your position. If you enter a trade worth 100 USD at a 10% margin, you only need to commit 10 USD to the trade. The remaining 90 USD is loaned to you by your CFD broker.
What cryptocurrencies can I trade using CFDs?
When crypto CFDs were first rolled out, Bitcoin and Ethereum were the two main crypto assets you could trade using CFDs. Now, this list has expanded significantly as more cryptocurrencies solidify their market caps. At INFINOX, you can trade up to 43 crypto CFDs, including Cardano and meme coins like Dogecoin.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.