Now worth over $3 trillion in total value, Cryptos have become increasingly popular among day-traders and investors beginning in the stock market. This popularity has led traders to find new ways to increase their profits.
What are CFDs? When trading contracts for difference (CFD), buyers and sellers establish a contract that specifies the buyers’ obligation to pay the seller the difference between the current value of an asset and its value at the time of contract. It allows investors to capitalize on markets’ volatility without owning an asset. Important to note is that CFDs do not consider the value of an underlying asset. Still, this lucrative strategy helps traders turn a profit, especially in highly volatile markets.
What are the benefits of trading CFDs? The crypto market is considered highly volatile, and therefore, it seems counterintuitive to increase your risk by trading crypto CFDs. Even though CFDs are risky, crypto exchanges can often be unresponsive, and they do not allow the investor to short the market.
Crypto CFDs enable traders to open long and short positions without owning the underlying asset, making it easy to close multiple positions with leverage. Leveraged trading means, for example, with an investment of $10 and leverage of 1:100, traders can open a position of $10,000. Naturally, this also increases the possible profit along with the risk.
Traders do not own an asset when trading CFDs, which can be beneficial since crypto exchanges are subject to hacking. Therefore, it is usually unwise to store your crypto directly on the exchange.
CFD trading platforms are quick and designed to enable easily opened positions with leverage, allowing traders to utilize a ‘virtual position’ fully and is an over-the-counter product to which traders can fully use volatility directly between broker and trader.
What are the risks of crypto CFDs? Trading CFDs is a suitable strategy for traders in a market full of volatility. Firstly, the crypto markets are already volatile of nature, coming with a high reward, but can also work against traders. When trading CFDs, it’s possible to lose more than you initially invested, and you might be required to add additional funds to compensate for your losses.
When going long, you might also be subject to holding costs. These holding costs incur when you have positions on some products overnight past 5:00 p.m. New York time. Although unlikely, holding costs can exceed profits when holding positions for a more extended holding period and is a factor that should be considered by any traders delving into CFD trading.
In addition to holding costs, traders must maintain their leverage. Traders need to keep sufficient funds in their accounts to cover total margin requirements when trading with leverage, with all the following consequences for your personal profit/loss statement when not required to do so. Market volatility also exists outside business hours, and prices can change quickly, making it very stressful to trade CFDs due to the risk of a close-out.
How do I make a profit trading CFDs? If you’re still interested in trading crypto CFDs, experience the market and practice without leverage to get used to the volatility of day-trading the crypto market. In the beginning, focus on small profits. Accordingly, limit your risks to develop a strategy that statistically makes you money in the long run. These profits/risks will increase when you trade with leverage, so always trade CFDs with caution.