Traditional trading methods have made their way into the cryptocurrency space.
This is most likely due to attention from institutional investors who are used to the trading models applied in forex, stocks, and commodities markets.
One particular model is cryptocurrency CFDs. These financial contracts enable you to make more money than you could with regular spot trading.
You’ll be able to place orders using only a fraction of the capital required to execute the trade, making crypto CFDs a good way to trade whilst having little trading capital.
What is Bitcoin CFD Trading?
A contract for difference (CFD) allows you to make money by betting on the future price of an asset. This asset could be a stock, commodity (oil, gas), or cryptocurrency.
Crypto CFDs allow you to trade based on the cryptocurrency’s price movements without owning any cryptocurrency.
The value of your CFD contract only matches the price difference between the start and end of the trade. You’re basically betting on whether or not the price of a cryptocurrency will rise or fall.
As the trader, you can bet on either an upwards price movement (known as “longing”) or a downwards price movement (which is known as “shorting”).
When trading crypto CFDs, you’re not buying the cryptocurrency, instead you’re buying a contract based on the tokens’ current price.
How to Offset Bitcoin Price Drops with Bitcoin CFDs Trading
One of the most common ways for investors to trade crypto CFDs is by using leverage when opening trades.
This is known as margin trading, where you pay a small amount of money as collateral whilst using leverage or borrowed funds to increase your position size.
You can long Bitcoin during a bull market to take advantage of price increases, depositing a small amount of your capital as a margin. You can then borrow money from your broker to increase your position size. If Bitcoins price does increase, you’ll make money on this trade, however, if the price drops, you’ll lose money.
If the price of Bitcoin is dropping, you can also short BTC CFDs to capitalize off of this price movement, or you can use the short to hedge against your long position.
This is why margin trading with crypto CFDs is a good way to trade with a smaller investment.
However, there are advantages and disadvantages to this strategy.
Advantages of Trading Crypto CFDs
- Increased Leverage
When you trade CFDs, you have access to higher leverage than traditional trading. This means you can deposit less of your funds as margin (collateral) for your trades.
For example, with 50:1 leverage, you would only need to deposit 1/50 or 2% of the opening trade value.
So a $100, 000 trade would only cost you $2, 000 which you would provide as collateral.
However, higher leverage comes with a risk of increasing your losses if the trade goes wrong, for example, if you long Bitcoin and the price drops down instead of increasing.
- The Market is Open 24/7
Since you are trading crypto CFDs, there are no time limits on your trades. This means you can open a position and close it anytime you want.
The market never closes.
- No Minimum Trading Requirements
Certain markets require you to deposit a minimum amount of capital to trade, or they may limit the number of trades you can perform in a day.
CFD markets don’t have these restrictions, allowing you to trade with as little as $100 – $500, depending on the platform you’re using.
Disadvantages of Trading Crypto CFDs
- CFD Trading Comes With Higher Risks
CFD trading comes with increased risk, especially if you’re margin trading. Using leverage increases your potential for larger gains but it also increases the chance of you suffering greater losses.
Some CFD platforms offer stop-losses to mitigate this but it is no guarantee you won’t lose any money whilst trading. This is especially true due to the volatile nature of the cryptocurrency market.
- Fewer Cryptocurrencies to Trade
You are limited when it comes to which cryptocurrencies you can trade, usually, you’re only able to trade blue-chip cryptocurrencies such as BTC, ETH, BCH, and XRP.
This means you cannot trade more volatile, lower market cap coins which have the potential for much higher returns.
On the flip side, these non-blue chip cryptocurrencies tend to drop just as hard as they rise.
Trading Bitcoin CFDs is not only a great way to diversify your crypto portfolio, but is also a potential door opener for additional income with smaller capital.
CFDs are flexible and can be tailored to your goals and trading style.
Consider the above-mentioned advantages and disadvantages to grow your financial portfolio faster.
Keep the risk in mind and remember to use leverage with caution.
Want to day trade +600 CFDs? Open a Bitcoin account here.
RECOMMENDED READING: EXPLAINER: 5 Key Differences Between Crypto Trading and Stock Trading
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