What is CFD
Typically, cryptocurrencies are bought and sold on specialized exchanges. However, there is another way – trade using contracts for difference (CFD). Today we will consider this relatively complex financial instrument and explain the principle of its operation in simple words.
A contract for difference is an agreement between a trader and a broker. If a trader buys a Bitcoin CFD, he does not own the cryptocurrency itself. He owns only the contract, which indicates at what price he bought the coin. At any time, the trader can close the position and return his contract to the broker. If his forecast turned out to be correct, he will receive a corresponding reward. In case of an error, the same amount will be debited from his account. With the help of CFDs, traders can bet both on growth and on depreciation.
Who Should Use Cryptocurrency CFD Trading
Leverage trading (or margin trading) is far from suitable for all cryptocurrency investors. It is recommended only to traders who open positions for several minutes or hours. When transferring a position to the next day, some brokers charge an additional fee.
With proper organization, margin trading can be extremely profitable. Take for example the case when in just a day XRP went up 84%. Of course, such opportunities are provided infrequently, but we all know that even without them, the cryptocurrency market is highly volatile.
The benefits of cryptocurrency CFD trading
First of all, transactions are executed very quickly and allow you to bet not only on growth, but also on the reduction of cryptocurrencies. In addition, anyone can open a free demo account that does not require initial investments.
For beginner crypto traders, it allows you to practice and get used to the market. Finally, you can start trading with only $ 10, and at any time use the support of a broker.
Cons of cryptocurrency CFD trading
Most brokers offer an extremely limited range of cryptocurrencies. As a rule, no more than 12 digital currencies are available; Often their number does not exceed six. Another huge drawback is that the share of brokers is increasing, charging a fee for transferring the position to the next day. In other words, if you leave an open position for several days, you can lose a large amount only because of its transfer.