Many people trade cryptocurrencies on exchanges, but there are other options through which to trade by speculating price movements such as Contracts For Difference (CFD), prediction, futures trading, options contracts and binary options.
CFDs are derivatives that work in the form of contracts between traders and brokerage firms and are a popular method of shorting cryptocurrencies. Those in this kind of contract do not actually own the underlying asset but will be buying the right to receive the difference between the current value of an asset and future value (price).
The trader receives the difference when their prediction is correct according to his or her predetermined position and pays the broker the difference if their prediction is negative. Since you do not own or keep the actual digital asset, it is also not possible to withdrawal it from the exchange and there is no wallet. This comes with some advantages because you will not care about wallets or anything technical about avoiding hacks etc.
The exception is with Bitmex and Deribit platforms on which you can deposit and withdraw actual crypto currency.
CFDs are common in the traditional markets as shares, indices, forex, and now in cryptocurrencies. They all tend to work the same. And because they are known as the best methods for day trading cryptocurrencies, below are a couple of ways on how to trade cryptocurrencies with CFDs.
Trading CFD with leverage
Trading CFD is done through a third-party service or a broker who provides a platform and leverages. Their platform allows you to open and close trading positions, analyze the market trends, and apply various features.
Almost every broker who offers CFDs now also offers leverage and most of regulated brokers will offer a maximum leverage of 5:1. This means you can trade 5 times of more cryptocurrency assets that you could afford with your present capital. Leverage means you have access to more crypto assets than your existing capital.
With a huge leverage, you are able to make more money even with small price movements (that can happen in bursts) if the bet moves in your direction. Otherwise, you might also make huge loses if the bet moves against you and hence the risk is huge.
Apart from crypto trading platforms such as eToro, some of the few cryptocurrency exchanges that do offer leverage trading include Bitmex, Kraken, and Poloniex. On these exchanges, leverage trading is only available with certain cryptocurrency pairs.
What happens in CFD trading?
First of all, selecting a platform on which to trade CFD is an important thing. You need to ask questions like whether their software is easy to use, how much commissions they charge, the range of markets they provide, reputation and security and trust.
Also, finding a good broker is important because if they will manipulate the price, then it won't be possible for the trader to benefit from the trade no matter how they try.
The common procedure of creating accounts and verification (where need be although there is an option of anonymous trades with some platforms) is followed. Then you enter your position: you select the asset pairs to trade and the leverages and your position, say by clicking buy.
When a trader enters a CFD position, the trade starts with a loss due to the spread gained by the broker and the trader expects that the price moves up or down to exceed that spread in order to make a profit.
There are many strategies that you can try in doing CFD trading. For instance, many traders try to benefit from swing trading which relies on benefiting from smaller reversals or swings within larger trends. For instance in bull markets, prices can experience periods of consolidation or retracement and fall below previous highs. An underlying momentum that continues to be positive could be regarded as a buying opportunity assuming prices will continue moving up.
Bear markets also always have opportunities to initiate short positions and it is always easy to identify and forecast trades. This is because it is always easy to spot trends although they can reverse as fast in crypto trading. The challenge is identifying the exact point of reversal.
Then the setting of stop losses and take profits, which is an almost compulsory if you do not want frustrations in any type of crypto trading. A stop loss order is an order created with intention of selling assets or closing a position when the market trend is against you. This is carried out in order to stop further losses. Take profit also allows you to lock in the profit before the price can move against you.
CFD is considered a better method of day trading cryptocurrencies because it has lower spreads compared to other methods of funding. The spread is the profit of the broker who is the market maker on both sides.
Which exchanges offer CFDs trading?
Not every crypto exchange will offer the CFD option. In fact most exchanges don't. However, there are a number that do, as follows:
BitMex offers futures, derivatives and margin trading. It allows you to trade BTC, ADA, BCH, EOS, ETH, LTC, XRP on CFD and leverage up to 100 times. Unlike many other trading platforms offering CFDs, it has the option to deposit and withdraw cryptocurrency.
BitMex also offers a variety of features including limit orders, market order, stop market order, stop limit, trailing stop and take profit limit. It offers perpetual contracts, traditional futures, upside profit contracts and downside profit contracts.
AvaTrade allows you to trade Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Dash, Ripple, and Litecoin with CFD and you can benefit from a 20:1 leverage. They offer in-house and external platforms including AvaTradeAct, the popular MetaTrader 4, AvaOptions, Automated Trading, AvaTradeGO, Web Trading, Mobile trading, and Mac Trading.
eToro, which is a popular brokerage, allows you to trade Bitcoin, Ethereum, Ripple, Litecoin, Dash, and Ethereum Classic among other types of cryptocurrencies. The exchange also offers another investment option called the Crypto CopyFund which has more cryptocurrency pair options and where you are able to copy trades by professional traders. With it, you can deposit and withdraw with credit/debit card, wire transfer, PayPal, Skrill, Union Pay, Neteller, WebMoney, and Yandex.
Markets.com is a London Stock Exchange listed company and regulated in South Africa and Cyprus. They offer CFD trading for Bitcoin, Ethereum, Litecoin, Dash, Ripple, Bitcoin Cash, and Ethereum Classic and some coins can even be traded in pair with Euro. They offer a maximum leverage of 5:1 with ETC/USD, ETH/USD, and BCH/USD pairs. With the rest of the coins, you can manage a leverage of up to 10:1.
They offer own platform versions and a person can trade from PC and mobile devices and even gain insights through all kinds of technical analysis tools, live streaming news feed, daily signals, and more. It is also possible to fund your account and withdraw cash via PayPal, Skrill, MasterCard, and VISA among others.
Admiral markets is a Financial Conduct Authority-regulated platform that also operates in Estonia and is popular in the Commonwealth of Independent States (CIS) region and around the world. It offers five cryptocurrencies with which you can trade with leverage of up to 5:1 including Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash although the pairs can be traded on MT4 only. They also limit exposure to crypto products to up to 10,000 euro or the equivalent in US dollars.
IG is a popular CFD trading and spread betting platform around the world and has been active for more than 40 years and now with over 185,000 happy customers. Although it offers only two cryptocurrencies, namely Bitcoin and Ethereum, you are able to trade Bitcoin against USD, EUR, and GBP.
XTB offers Forex and CFD products trading and offers CFD trading of Bitcoin, Ethereum, Litecoin, Ripple, and Dash. The spread is 15 pips with BTC, five pips with ETH and DSH, and less than one point with LTC and XRP. You can trade on the MT4 or their xStation 5 which has a number of features including trading calculator, charts, statistics, technical analysis instruments, fast execution, market sentiment, and more.
Trade.com is run by the Leadcapital Markets Ltd and offers four cryptocurrencies for which you can trade CFD including Bitcoin, Litecoin, Ethereum, and Dash. You can trade cryptocurrencies through MT4, Sirix, or the WebTrade platform. Again, you are able to deposit and withdraw funds through credit/debit card (MasterCard, VISA), bank wire transfer, and e-wallets such as Skrill, Neteller, Webmoney, and Qiwi.
UFX is a CFD broker licensed and allows people to trade Bitcoin, Ripple, EOS, and OmiseGo. EOS and OMG with CFD. It accepts wire transfer, Poli Payments, credit/debit card (Visa, MasterCard), Sofort, Skrill, and Neteller.
FXOpen allows you to trade Bitcoin, Ethereum, Dash, Litecoin, Emercoin, Namecoin, and Peercoin with CFD and a maximum leverage of 3:1.
SimpleFX is supported in many countries around the world and offers to trade CDF for BTC, LTC, ETH, XRP coins. It offers mobile trading, negative balance protection, affiliate program, guest accounts and two-factor authentication security.
Benefits and bad side of CFD crypto trading
One of the most common benefits of many platforms offering CFD trading is that traders are able to get leverage and margin trading. That means you could gain a lot of profits for a relatively small capital put into trading.
Another benefit of CFDs is that most CFD brokers have easy-to-join and easy-to-get-set-up processes compared to the technical processes for many crypto exchange platform trading. You also won't worry about issues of crypto hacking and theft as well as other challenges related to fees and delays in deposits, encryption, withdrawals and transfers of assets.
Like mentioned, you won't need to understand the technical side of creating wallets, storing, transferring and owning Bitcoins or other crypto assets. For instance, many people feel that opening wallets and verifying identities on cryptocurrency exchange takes time and is too technical for new comers. People who are used to trading CFDs for other products will also find the movement easier to adapt in cryptocurrencies.
Besides these advantages, CFDs are tax efficient, and are flexible in that you can trade even on a falling market. It is also flexible in that it allows you to trade as little or as much as you want. It is a strategy that suits people looking for short-term opportunities they can open for a few days or weeks instead of several weeks or months. The trader can also be as active or passive as they want. It also offers a very good option for those willing to diversify their portfolios.
However, crypto CFD trading has its bad side. The first one is that it comes at a cost. The price movement needs to be higher than the price movement which covers the trading commissions. It is not easy to verify (or that it takes time to do so) that the prices on the platform are better than the general market movements or directly sourced from an exchange. Price manipulation on a platform can see you gain nothing at the end of the day.
Tips to winning in CFD trading
The first and obvious thing you might want to do is to try CFD trading using demo account. Second is to have a mentality of building a solid trading foundation instead of launching a get-rich scheme. The latter won't work and will come with its frustrations.
That said, here are tips to help you trade CFDs better.
1. Preserve Precious capital: Marcel Link’s brilliant trading book titled “High Probability Trading“ should shed enough light on this but basically, it is an idea that you should try as much as possible to keep your money by minimizing losses on these trades.
2. Edge edge edge: You need to workout an edge and be diligent, disciplined and confident about it because every professional trader is dedicated to win money from your pockets.
In addition to having a money management plan, keep on perfecting your trade entry and exit techniques and sharpening your ability to remain patient as you wait for opportunities. You can create an edge by working on your ability to trade news and reacting timely on events that are likely to affect prices.
3. Control your leverage: Leverage can be a powerful tool if the market is moving your way but this will tempt you to keep increasing the positions. Yet an inevitable loss could be on the wait even as the temptation to leverage grows. That said, keep emotional roller coaster ride out of the way and be truthful to risk assessment in relation to the CFD position.
Always look at valuation of assets. It is also advisable to start small with the leverage and keep low the total exposure low relative to the capital base. If you are not as much experienced, try out to gain experience with a position size of 3 times your account size before you can grow it.
4. Use stop losses and take profits: For every trade you enter, make sure to identify a CFD stop trade price outside of market hours of live trading with prices moving. Avoid the emotions when market are falling just the same way you should avoid them when the prices are going your direction. Many traders will work out a stop loss trade price using technical analyses to determine their sell prices.
5. Define your trading goals: Besides the goals of making profits every week or by putting a certain amount, go get longer time goals that will make you a better trader by day. For instance you might look at a goal of keeping the trading account intact and active for one year.
By the one year, you will have learnt a lot about prices and you would be ready to make wiser guesses in year two. That will make you develop the character of a true trader. It is a career.
6. Keep and share a trading journal: Point number 5 said, it is crucial to record all the trades with a diary entry on your life. This will help you track your trading goals and maintain and improve it. From it, you can implement strategies and review them to watch for certain patterns.
For instance, you can check and gain clarity on reasons for entering and exiting every trade and assess whether it was helpful. It helps you to review your activity and will be one of the most powerful learning experience you will have as a crypto trader.
The journal can help track not just the coins you are trading but also the time trade was entered and exited, reasons for trading the coin, profit or loss incurred, and the trading rules followed if any (and a note on whether you followed any).
Other issues to track include the lessons you learned on entry and exit and overall trade management, rating assigned to a trade, and charts showing proposed entry, stop and profit target.
7. Have a well defined trading plan: Research your trading methodologies. You can also use back-testing software such as Metastock, AmiBroker, TradeStation and NinjaTrader to test entry set ups for a good entry strategy. The second is a good money management strategy (including not investing all, diversifying etc), then a risk management strategy, then understanding how to set stop losses and take profits and to use technical analyses. Others include a workable record keeping strategy.
8. Be disciplined and stick to your trading plan: It can be so frustrating to keep throwing out a plan you have spent so much time to research on and develop, then coming back to review nothing.
9. Scale in and out of the CFD trades: It can be hard to know when profit streaks strikes but series of wins in rows are uncommon for many traders even several times in every single year. Then this is the time to add to your winning positions by scaling in.
On lean months, it is time to go slow and to preserve thy precious capital even if you are not making any profits. Finally, a good trader learns how to apply pyramiding techniques in their trading. Scaling can be a good option if the trading system provides the opportunity for good trending trades, otherwise, don't scale.
10. Maintain a positive attitude