A Complete Guide to Trading Cryptocurrency CFDs — Part II
Last week, I gave you an introduction to trading cryptocurrency CFDs. If you haven’t checked out that post, you can find it here. Now, that you’ve got a clear picture of what are CFDs, let’s take a look at key terms that you should know before you begin trading with Crypto CFDs.
Key Terms to Know
If you are considering giving Crypto CFDs a try, you need to, first understand the technical terms associated with it. Here’s what you need to know:
· Ask Price — This is the price at which you purchase a CFD.
· Bid Price — This is the price at which you sell a CFD.
· Leverage — This is a tool that lets you buy or sell CFDs at more capital than you actually have. As leverage, is a crucial component of crypto CFD trading, here’s a detailed explanation on it.
As you would know by now, that CFDs are leveraged. You have to deposit only a particular percentage of the trade to open a position. For instance, if you open the CFD trading with the US $100, and choose leverage of 5:1, then it means that your trade is worth 5x the initial outlay. This means it’s worth the US $500 instead of the US $100 you paid up-front.
As you can see, leverage helps you enjoy higher profits if the trade moves as predicted by you. However, you are also likely to lose more, if your predictions go awry.
· Margin — This is the amount you have to deposit to open your CFD. For instance, if the margin is 10% and you’re placing a trade that is worth US $1000, then you have to deposit US $100 initially.
· Stop Loss — This is a trading tool that lets you set a price value at which your CFD will be closed. This helps to minimize your potential losses if your predictions don’t work in your favour.
· Take Profit — This is similar to a stop loss order, but the one major difference is that here you set a predetermined price level, at which your CFD position will be closed. This helps you to secure your profits before the market moves against your predictions.
Very often, CFD Crypto trading is compared with Forex trading, since both involve trading. However, though both deal with different commodities (one digital coin, the other stock market shares), there are several similarities as well as differences.
Similarities between Crypto Trading and Forex Trading
In both cases, trading is carried out online using a dedicated platform. Both these processes require funds to begin the trade. You have to deposit money with a broker before you can start trading.
Both require you to speculate market prices. As a trader, you have to predict prices, so that you can either sell or buy as desired.
Both CFD Crypto trading and Forex trading make use of technical indicators for trading purposes. You can opt for managed accounts in both cases. A managed account is where you deposit funds with a fund manager, who then carries the trades on your behalf for a commission.
Differences between Crypto CFD Trading and Forex Trading
Coming to the differences, in Crypto CFD trading the platforms are known as Crypto exchanges. On the other hand, Forex trading happens on dedicated Forex platforms.
Another major difference is the way the trades are funded. For CFD Crypto trading, you have to deposit the funds in the exchange as Crypto coins. Additionally, some Crypto exchanges don’t put your deposits in trading pairs. In such cases, you buy and sell using only one cryptocurrency. On the other hand, trading platforms like CashFinex offer you pairs (crypto — fiat currency pairs or crypto — crypto pairs) with exchange rates similar to the Forex market.
Another technical difference is that the assets in Crypto CFDs are decentralized, while the assets traded in Forex are regulated by centralized organizations. Factors like market inflation that plague Forex trading is of not much concern in Crypto trading.
Similarly, the factors that drive price change in both are totally different. Cryptocurrencies are significantly more volatile than the fiat currencies that power Forex trading.
Now, coming to the big question –
Should you purchase and store cryptocurrency or should you trade crypto CFDs? Which is likely to generate more profits for you?
Ultimately, there’s no single answer. It all depends on your trading style, personal preferences, and goals.
You may consider buying Cryptocurrencies, If
You are looking to generate long-term profits. You can buy cryptocurrency now, forget all about it for a long time (say 5 or more years) and then sell it for a profit. Unless the crypto-coin you purchase does a 180-degree nosedive, there’s minimal risk associated with this approach.
However, this method doesn’t offer you significant returns like trading crypto CFDs. Additionally; you have to bear the risks of storing cryptos on an exchange.
You can Consider trading Crypto CFDs, If
You are looking to make large profits in the short-term. Crypto CFDs work better for advanced traders, who have at least some experience with trading on the market. Crypto CFDs have low spreads, thereby it has a larger potential for profit, irrespective of the overall market position. Additionally, since it involves marginal trading, your profits are likely to get magnified.
The next step is to
Find a Broker for Trading Crypto CFDs
That’s easier said than done. Here are some features to consider while choosing the right online brokerage platform for you.
· Trust and regulation
· Fees and Other Costs
· Availability of Crypto-crypto pairs and crypto-fiat currency pairs
Finally, Here’s a Pro Tip
The cryptocurrency market is still new compared to Forex. So, make sure that you never stop learning. Check out other posts on our blog, read the latest crypto news and acquaint yourself with crypto glossary and crypto tools. This way you learn the tricks and tips of the game.
Now that you are aware of the various benefits of trading with crypto CFDs, it’s time to begin trading. Register on the CashFinex platform and start taking benefits of the high volatility of cryptocurrencies.
Disclaimer: Trading Cryptocurrencies or any other cryptocurrency derivatives is highly speculative, carries a high level of risk and is not appropriate for every investor. You may sustain a loss of some or all of your invested capital , therefore, you should not speculate with capital that you cannot afford to lose.