How to Trade Cryptocurrency CFDs

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CFDs, or contracts for difference, are a type of short-term trading that lets you speculate on price movements. Unlike trading in shares, you don’t actually own the asset you are speculating on, instead you are making a guess about how the price of the asset is going to move – up or down. So it’s all about predicting the direction of trends. Get it right, and you make money; get it wrong and you incur losses.

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You trade CFDs through a broker; there’s a list of brokers on our Broker Listing page.

CFDs can be taken out on a variety of financial instruments. One of the new assets you can speculate on are cryptocurrencies – decentralised and encrypted digital currencies. The best-known cryptocurrency is Bitcoin, and other popular coins include Litecoin, Ether, Ripple and Bitcoin Cash; there are thousands of others. You can see prices for cryptocurrencies on our cryptocurrencies page.

 

How Do CFDs Work?

A CFD is a contract that you take out with your broker, in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. If you open a long position, it means you think the price is going to go up. Should the cryptocurrency increase in value then you will make a profit: for every point that the price moves in your nominated direction, you will be paid multiples of the number of units your contract was for. However, if the asset falls in price you will make a loss, and the bigger the fall, the bigger your loss.

If you open a short position it means you think the price is going to go down. If you’re right, you get the profit; but if it goes up, you lose.

This offers you the potential to make a profit in both rising and falling markets.

CFDs are liable for capital gains tax, but any losses can be offset against profits for tax purposes.

 

Currency Pairs

A cryptocurrency CFD will measure the value of your chosen cryptocurrency against something else. Often this will be US dollars, which means you are betting that the “exchange rate” for, say, Bitcoin (BTC) and US dollars (USD) will go in the direction you have predicted.

Some exchanges allow you to bet on a pair of two cryptocurrencies, such as BTC and LTC.

 

Leverage

One of the attractions of trading in CFDs is that you can use leverage. This is like taking out a loan to multiply the capital you have to play with. When you open a CFD trade, you only need to deposit a small percentage of the trade’s total value. This means you can multiply your returns because you will receive 100% of the gains if the price moves your way.

However, this also presents a big danger. Since your losses are calculated on the value of your full position, leverage means you can end up losing a lot more than you initial deposit.

 

How do I Trade in CFDs?

You start by opening an account with a broker that offers cryptocurrency CFDs. Look at which cryptocurrency pairs the different brokers offer, to make sure they have the one you want.

You will need to choose a cryptocurrency trading platform. Most brokers will offer you a choice of using your browser, using a mobile app, or using a standalone program to run on your computer.

Then you need to do some analysis of the cryptocurrency market, to identify a currency with a clear trend. You need to have a clear plan of how you intend to trade, and what research you intend to do. Include risk management tools in your plan.

You can then open a position by taking out a CFD. You will define the size of the position, and which direction you think the price will move – for a long position you select ‘buy’ and for a short position you select ‘sell’. You can add stops and limits to automatically close the trade once it hits a certain level. This provides you with protection should the trade move against you.

The dealing platform will let you monitor the profit or loss of your CFD, and to close it when you think it’s time.

 

An Example of a Cryptocurrency CFD

Let’s say that you think the price of Ether is going to fall in value against the dollar, so you decide to take out a short contract for ETH/USD.

For this example, we’ll say the current market price for ETH is 200. You decide to sell 5 contracts (each contract is worth 1 ETH). If the price of ETH does go down, you will profit. If the price goes to 150 and you close the position, you take the profit by buying 5 contracts at the buy price of 155 (slightly higher than the market price due to the spread).

The market moved 45 points in your favour, so the profit will be $45 for each contract, which comes to $225.

However, if your prediction of the trend turns out to be wrong, then you will close the position at a loss. Let’s say the market rose by 15 points to 215. You have to buy back 5 contracts at the buy price of 217. That means your loss will be $17 times 5, which equals $85.

 

Warning

CFDs are speculative; cryptocurrencies are speculative and highly volatile. That means cryptocurrency CFDs are risky. Around 76% of retail investors lose money when trading in CFDs.

 

You can compare respected brokers on our Broker Listing page.

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