Cryptocurrencies have become increasingly popular financial instruments. As it’s becoming more mainstream and better regulated, analysts believe cryptos are on the brink of another bull run.
Get a comprehensive overview on how to trade crypto via CFDs, the risks involved and how it’s regulated by financial authorities.
What are cryptocurrencies?
They’re digital, or virtual currencies generated by encryption procedures, also known as mining. Cryptocurrencies operate as a decentralised currency, meaning they’re independent of a central bank. Bitcoin is an example of a cryptocurrency. Have a look at the live price in the BTC/USD chart.
What are CFDs on cryptocurrencies?
CFD is the acronym for contract for difference. It’s a type of short-term trading that allows the investor to speculate on the price movements of a variety of financial instruments such as cryptocurrencies, without actually owning the primary asset. A CFD can be referred to as derivative instrument.
When trading CFDs on any cryptocurrency, you’re speculating on the difference between its current and its future price. In other words, if you foresaw the trend direction, you gained. If the trend moved against you, you will have incurred in losses.
This short video on trading cryptocurrencies CFDs further illustrates the concept. It uses the popular digital currency Bitcoin as an example.
Advantages of trading cryptocurrency via CFDs
It allows a short-term investment – on what is typically considered a long-term investment – that can generate income during a limited timeframe.
If you invest directly on crypto, your money is kept in digital wallets. Your money is safe in your account when using a broker for CFDs. Brokering services are also regulated by financial authorities, further enhancing the security of your funds.
The benefits of operating through a regulated trading tool don’t end there. Your funds would be safe from being used in illegal activities (e.g. terrorism) and are fully transparent when it comes to taxation.
On the other hand, when investing directing on cryptos there’s a greater great risk of loss of access to the digital wallet – where your funds are kept – and vulnerability to exchange hacks.
Another aspect to consider is liquidity, with CFDs there are no ties to the asset, only speculation on the price oscillation. This can provide significantly greater freedom to change to other markets.
What are the risks?
It must be noted that there is a high degree of risk in CFD trading. Given that the price of investments can both rise and fall, you may suffer losses if the market moves against your expectations. In leveraged trading there are higher potential returns which go hand-in-hand with greater risks.
CFD trading: who is it is suitable for?
The short answer is – pretty much anyone. CFD trading is a popular choice across the skill spectrum, from beginner to expert. CFDs attract trade newbies mainly for the access to various financial markets without the need for a large amount of starting capital. Share traders turn to CFD trading as an efficient portfolio diversification and risk-hedging tool. The convenience of using a single platform with access to multiple markets only adds to this derivative’s popularity.
ESMA requirements on crypto trading via CFDs (leverage limits)
Back in March, the European Securities and Markets Authority – or ESMA for short – set new, stricter guidelines on trading cryptos via CFDs. Under the new rules, the leverage offered on cryptocurrency CFDs will be limited to 2:1 . The European regulator has also stated that it will continue to monitor the risks involved in cryptocurrency CFDs to assess whether further measures will be needed.