Since the 2017 historic Crypto-boom, cryptocurrencies have fascinated investors who have sought new ways to invest in this digital asset. While some investors opt to purchase and hold cryptocurrencies for prolonged periods of time in the hopes of making a profit, CFD traders will speculate on the price fluctuation of a cryptocurrency against a major fiat currency. In this article we will be analysing what it means to trade cryptocurrency CFDs and how it differs from actually purchasing and owning cryptos!
What are cryptocurrencies?
Cryptocurrencies are encrypted digital currencies which can be used to make online payments or transferred between peers. Cryptocurrencies are decentralized, which means that they are not governed by any central bank or government institution. Cryptos use a master ledger called the “blockchain” to record and store all the transactions. The “Miners” act as the “record keepers” for the cryptocurrency communities by creating new coins and verifying the blockchains.
Why are cryptocurrencies so popular?
Cryptocurrencies have enjoyed massive media attention in 2017 when what we now know as the “Crypto-BOOM” was recorded. Leading cryptos such as bitcoin (BTC), litecoin (LTC) and ethereum (ETH) have managed to multiply their value thousands of times within a few months, gaining immense recognition as high-value assets. In fact, bitcoin has been characterised as the new digital version of gold since it rose to a $20,000 all-time high which was four times higher than the price of 400 Troy ounces of gold!
How does cryptocurrency trading work?
There are some fundamental differences between CFD (or contract for difference) trading and actual crypto-ownership. In order to purchase bitcoins, users must create an encrypted wallet whereas with CFD trading, traders can speculate on their value against another currency.
CFD trading enables traders to speculate place a BUY or SELL position depending on whether they think a certain cryptocurrency will higher or lower in value against another currency such as the EUR or the USD. This is precisely why, on trading platforms such as the MetaTrader, cryptocurrencies are quoted in pairs such as bitcoin against U.S. Dollar or BTCUSD. It is crucial to highlight here that trading crypto pairs does not equal owning the quoted cryptocurrency. When trading bitcoin CFDs for example, an agreement is made to exchange the difference in value of bitcoin from the time when the contract begins and the time when it is closed. As with any CFD trade, the change in bitcoin price dictates how much is gained or lost from each trade once the trader closes the position!**
*Please note that cryptocurrency CFD trading is a leveraged product. This means that traders can make small deposits and enjoy a much larger market exposure. Using leverage can entail significant benefits and risks. Investors could lose all of their invested capital and it is crucial to understand the risks involved before depositing any funds.
**Article Sources: Investopedia Nov 5, 13:00 GMT