What Are Bitcoin CFDs?

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What Are Bitcoin CFDs?

A Contract for Difference (CFD) is an advanced trading product which has gained popularity together with a variety of other trading options, including indices, forex, and futures. With the rise in popularity of cryptocurrency, it has become possible to start trading Bitcoin CFDs. Here’s everything you need to know about the topic.

What are Bitcoin CFDs?

CFDs allow traders to capitalise on the price movement of a commodity, such as Bitcoin, without having to actually purchase said commodity. At its most basic, a CFD is a bet between a buyer and a seller about the future price of an underlying asset.

CFD traders who believe that the price of Bitcoin will increase in the future take a long position, whereas those who believe that the price will decrease take a short position. A broker manages the buy and sell instructions sent by traders, and facilitates the entire process, by providing an online platform to easily trade CFDs.

Bitcoin CFDs, like their traditional counterparts, uses leverage or margin trading to amplify the volume of trades. When the price of Bitcoin rises, a buyer will offer his/her holding for sale. The net difference, or spread, in price between the starting and closing positions, are added together and the resulting gain or loss is settled through the trader’s brokerage account. Similarly, a trader who started by opening a sell position would purchase an offsetting trade once the price lowers and receive the net difference of the gain or loss through the brokerage account.

Differences between a CFD Broker and a Cryptocurrency Exchange / Broker

When you use a cryptocurrency exchange, such as Binance or Coinbase Pro, you are literally buying currency. The Bitcoin or Altcoin which you purchase is your property, and no matter what happens to the value of this property, it is yours until you decide to sell it. The same is true for typical cryptocurrency brokers, such as the ones you would find on P2P platforms such as LocalBitcoins.

Here are some key points to keep in mind:

  • CFD is a type of derivative trading.
  • When buying a Bitcoin CFD you are not technically buying Bitcoin as a form of currency but a contract between you and the CFD broker.
  • CFDs allow for margin trading and leverage.

Both CFD brokers and typical exchanges or brokers facilitate the buying and selling process in exchange for commissions or fees. However, buying Bitcoin CFDs does not give you any actual currency. All you get is a contract which derives its value from the cryptocurrency it is based upon.

Different CFD Brokers Available

The CFD broker market is quite saturated and selecting the right broker for you can be tricky. Choosing new or unknown brokers puts an added risk on an already high-risk investment, so it is always safer to use reputable platforms. The following are some of the best Bitcoin CFD brokers available.

Plus 500

Plus500 has gained a strong reputation as a CFD broker, in part thanks to its FCA approval and its listing on the London Stock Exchange. Well-suited for professional traders, the platform offers negative balance protection, which means that you cannot lose more than your deposit. Plus500 accepts funding through cards and Skrill.

eToro

With registered offices in the UK and Cyprus, eToro is a social trading platform which boasts over 5 million users in over 170 countries. Better suited for those entering the Bitcoin CFD market, the platform allows newbies to learn from more experienced CFD traders.

IQ Option

Founded in 2013, IQ Option is based in Cyprus and regulated by the Cyprus Securities and Exchange Commission. Boasting 20 million account holders, the platform allows demo accounts as well as maximum leverages of 1000:1 for professional traders.

Main Benefits of Bitcoin CFDs

When you buy or sell Bitcoin CFDs you are not actually buying or selling Bitcoin. Therefore, at no point during your trade do you need to worry about storing your Bitcoin in safe cryptocurrency wallets so as not to get it hacked or stolen.

Another important advantage of CFDs is that you can trade using margin. Similar to margin trading of an actual commodity, CFD leverage allows you to open a much larger position than you have the budget for. With every successful trade, you get to keep the additional gains made from the loaned amount, minus the broker’s fees.

The main advantage, however, lies in the fact that an investor can benefit from both bullish markets, that is when prices are going up, as well as from bearish markets, which means when Bitcoin prices are going down. By purchasing the actual currency of Bitcoin (BTC), investors can only benefit from bullish markets and have to wait for the bearish market to pass to be able to invest again. On the other hand, by opening a Bitcoin CFD short position, traders may also make a profit from a bearish market.

With some of the best CFD brokers available, including the ones mentioned above, it is very easy to get started. Investors can opt to take long or short positions and since there is no ownership of the underlying asset there are normally no shorting or borrowing interest charges.

Generally, commissions and fees for Bitcoin CFD trading are much lower than typical exchanges or broker’s fees. In certain cases, there are no fees, with brokers making their money from the trader who pays the spread.

Cons of CFDs

CFDs are complex and high-risk financial instruments which see an average of over 66% of retail investors lose money, even when using some of the best brokerage platforms as mentioned above. Furthermore, trading on leverage amplifies losses in the same way it could amplify profits. You need to be able to afford such losses before you start trading CFDs.

Until you close your open position, brokerage platforms normally charge you overnight fees. It is important that you take these fees into account before planning your investment strategy.

Ultimately, since you do not own the underlying asset, such as Bitcoin, you could lose your money before the currency has an opportunity to perform closer to your projections. You should also be wary of overtrading, where you might be tempted to increase your risk in order to recoup your losses.

Trading Bitcoin CFDs can have a positive impact on your investment portfolio, but it is important to understand the risks before you begin.

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