What Is CFD In Cryptocurrency There is no dearth of ways to invest or trade in cryptocurrency or the traditional financial markets. This is not a sur
What Is CFD In Cryptocurrency
There is no dearth of ways to invest or trade in cryptocurrency or the traditional financial markets. This is not a surprise as they have had decades to come up with all the different financial instruments. Traders and investors flock towards the instruments that serve them the best. Each person and institution has different levels of capital, risk appetite, investment timeframe, etc. That is why they need a financial instrument that serves them the best.
In this article, we are going to discuss something called a CFD or Contract For Difference. They have been around for a long time. Since the 1990s to be precise. They were initially used by institutional investors but were later introduced to retail investors as well. But what exactly is a contract for difference? This is something that needs to be explained in a clear manner for the average person to understand.
Also Read:How Do Bitcoin Exchanges Work
What Is CFD?
CFD stands for contract for difference. It belongs to the derivative family of financial instruments. It is quite a popular method among traders and investors. The reason is that it allows them to invest in an asset without actually owning the underlying asset. It also allows them to hedge their risks against other instruments in a volatile market.
How Does it Work?
In a Contract for Difference, a person/institution trades or invests in an asset by engaging with a broker. This is very different from the normal markets where you simply open a position. In CFD, you are essentially entering into a contract with a broker. The agreement between the two parties is to replicate the market conditions and settle the difference amongst themselves when the position is closed.
That means, at the end of the contract, the seller pays the buyer the difference between the value of the asset at the time of closing and the value at the time of starting the contract. If the difference is negative, the buyer pays the seller instead. An important thing to keep in mind is that a CFD is a leveraged product. So, if you trade using CFDs, you will be trading on margin. As with all other margin tradings, the potential for both profits and losses can be tremendous.
Advantages of CFD
However, there are also many advantages of CFD that are not there in normal trading. The following are some of the advantages of a CFD:
1. It provides access to the overseas market.
2. It allows for short positions for assets that don’t have margin trading.
3. There are no time limits as such and a contract can go on forever.
4. There are no restrictions on entry or exit prices.
5. You are not required to buy or sell first in order to enter the market.
6. You can close your contract/position at any time during market hours.
Given the interest of institutional and retail investors, it was natural for CFDs to be applied to Bitcoin and altcoins as well. That is why, in recent times, many traders and investors have begun using CFDs for cryptocurrency.
Also Read: What Is Crypto Arbitrage Trading?
CFD Trading In Bitcoin and Cryptocurrency
So, now that you understand CFD, let’s take a look at how it applies to cryptocurrency. For this purpose, we will take bitcoin as an example. A Bitcoin CFD allows traders and investors to trade/invest in bitcoin without needing to buy it directly. This allows them to leverage the benefits of bitcoin without facing the risks associated with cryptocurrency.
With Bitcoin and cryptocurrency, most traders are usually concerned about buying and storing it securely. This is an entirely new technology and it will take some time for people to get comfortable. There are other downsides to investing directly in crypto as well. Processing times of cryptocurrency transactions are usually slower. They are also unregulated in many places. There are also risks of hackers and spammers.
Also read: Avoid Bitcoin Scams
With a bitcoin CFD, you face none of those risks. That’s because you are investing in a contract basically. Not the actual asset. You don’t need to buy it, store it, transfer it or anything else. When you are in profit, you just close the contract and take profits. That’s it. This is why a lot of institutional and retail investors are so interested in CFDs in crypto. They simplify a lot of things.
Advantages of CFD In Bitcoin & Cryptocurrency
There are many advantages of CFD in crypto. This is why it is gaining more and more traction with each passing year. In the future, we can expect much higher interest in them from investors and traders. The following are some of the advantages that you should know about:
1. High Speed
A CFD contract takes place instantly. Since you are not investing directly in cryptocurrency, it saves you on the processing time. In a volatile market like cryptocurrency, tiny differences can have a huge impact.
2. Take Long/Short Positions
Just like in other markets, you can either long the underlying crypto or short it. There are no restrictions on the entry or exit prices or the position itself. That is why, no matter what the underlying crypto is doing, you can still make a profit. Many retail investors tend to think that only a bull market is ripe for making money. If you are trading using CFD (among other ways), you can make money in a bear market as well.
3. Margin Trading
A CFD is a margin instrument. Therefore, you can potentially make huge profits if you manage your position well. In a volatile market like crypto, it is important to be careful but it also allows for good profits.
4. You Can Use Fiat Currencies
To trade in a CFD, you can use fiat currencies even though the underlying asset is a crypto. This is a huge point of relief for those who don’t want to get involved directly with crypto. It provides for a really smooth experience.