CFD Crypto Trading

CFD crypto trading lets investors capitalise on the blockchain currency hype that has taken the world by storm over the past few years. Since the creation of Bitcoin in 2009, hundreds of other cryptocurrencies have been created and now form a massive part of the trading landscape. This page will detail how you can trade cryptocurrencies using a contract for difference, or CFD, outlining key information like how to get started, online strategies and top tips. We have also listed our top recommended CFD crypto brokers below.

What Is CFD Crypto Trading?

What Are Cryptos?

Cryptocurrencies are digital currencies that do not exist in physical form. They were created as a potential alternative to fiat currencies like the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR) and are often decentralised, meaning that there is no central bank or government authority in control.

All transactions are recorded in an online ledger called a blockchain, which has a special immutable architecture.

How Does CFD Crypto Trading Work?

CFD cryptocurrency trading works similarly to other CFD (contract for difference) trades. This is where two parties will enter a contract that states that the difference between the opening and closing values of the asset will be paid by either the broker or investor (depending on the type taken out and the direction of price movement).

CFDs are derivative products, so traders do not take ownership of the underlying asset, they simply make or lose money based on the change in its value. CFD crypto trading allows investors to make money from both bullish and bearish trends by way of long positions, essentially a bet that the price will rise, and short positions, a bet on a decreasing value.

CFD crypto trading with ethereum and bitcoin

The high volatility of cryptocurrencies has made them a prime choice for CFDs because the frequent and large fluctuations offer traders ample opportunity to generate impressive profits, especially when trading with leverage. For example, the volatility of the cryptocurrency Ethereum (ETH) has made for an attractive CFD crypto trading asset. In the first half of 2021 alone, the price rose from $730 to just over $4,100 and fell back down to a price just under $1,780.

Pros Of CFD Crypto Trading

There are several benefits to CFD crypto trading:

  • Security – CFD trading offers easy access to crypto markets without the requirement for a digital wallet, where you would store any owned tokens. There have been some horror stories of digital wallets being compromised but, because CFDs do not require ownership of an asset, they avoid this issue.
  • Margin trading – The initial investments required to open CFD trades can be just a fraction of the entire trade value, making them more accessible. Also, any added leverage in the trade means that any gains are multiplied, further increasing profits.
  • High liquidity – Investing in cryptocurrencies requires you to exchange from a fiat currency into your choice of crypto, which can sometimes take time to validate. This can not only be inconvenient but it can lose you money if the currency changes value before the transaction is carried out. CFD crypto trading avoids this issue altogether as does not require any currency exchange, contracts are taken out using fiat currencies.

Cons Of CFD Crypto Trading

It is important also to know the drawbacks associated with CFD crypto trading:

  • High risk – using leverage, especially with an asset as volatile as crypto, brings both reward and risk increases. Losses are magnified just as much as profits when margin trading, which can even result in the loss of more money than was initially staked or exists in the trading account. This is such a big problem that many regulators have restricted the maximum leverage on CFD crypto trades or even outright banned the instruments.
  • High costs – CFD crypto trading often involves additional fees for opening positions, closing positions and extending deadlines. A deadline is a point at which, if you have not closed your position, it is closed for you. This can happen whether you are in a positive or negative position, though you may be able to pay a fee to extend the deadline. However, the fee is unlikely to be insignificant and you can quickly rack up costs by continually postponing the deadline, waiting for an ideal closing position, which gets further away every time.
  • Little variety – If you want to trade using a wide range of different cryptocurrencies then you may want to avoid CFD cryptos as there is limited choice of coins beyond the biggest and most well-known, such as Bitcoin, Ethereum and Litecoin.

How To Start Trading

Choose A Broker

To perform your CFD crypto trades, you will need an account with a broker that gives access to an online trading platform. Many brokers around the world offer CFD crypto trading, each of which has its own benefits and drawbacks, so you need to find the one that is best for you.

Look out for brokers that offer negative balance protection, which ensures that you cannot lose any more than the funds that are already in your account. Additionally, you will likely want to use a broker that lets you implement stop-loss orders on your trades. These are actions that allow you to cut your losses if the underlying asset’s price is moving in the opposite direction to your prediction by closing the position at a predefined level.

Pricing can make a big difference to your success when CFD crypto trading, especially when following a short-term strategy. Fees and commissions can quickly eat away at any profits you make, so be on the lookout for brokers with transparent and competitive fee structures, including overnight swaps, transaction charges and spreads.

You should also consider some of the optional additional features that many brokers offer, including demo accounts to practise CFD crypto trading in a simulated, risk-free environment, automated trading functionality and educational courses.

Strategies

CFD crypto trading without a strategy in place is a risky business as you can quickly rack up big losses. The high risk involved with crypto CFDs means that you need to carefully consider your risk appetite and find a management approach in line with your strategy.

Two popular strategies for CFD crypto trading include:

Breakout Trading

This strategy involves identifying a channel of resistance and support levels that the asset is consistently oscillating between. A breakout trader would wait until the price breaks through either level and then open a position for the breakout to be consolidated and become a new trend.

Contrarian Trading

This strategy is similar to swing trading, entailing betting against a consolidated trend as you are anticipating its reversal. This can be indicated in several ways, for example, a declining trading volume.

For more trading strategies and further guidance and advice, see our strategies guide.

Trading Regulations

CFD crypto trading is often strictly regulated so that traders are protected against any potential scams, untrustworthy brokers or predatory practices. If you are trading in Europe, then look for brokers regulated by the Cyprus Securities & Exchange Commission (CySEC) or the European Securities and Markets Authority (ESMA). European markets have recently stepped up CFD crypto trading restrictions, imposing a 1:2 leverage rate limit for retail clients.

Note that the FCA has recently banned UK-based brokers, such as Trading 212 and eToro, from selling crypto CFDs to retail traders, though residents can open accounts with offshore regulated brokers to continue CFD crypto trading.

In the USA, CFDs are banned outright, crypto or not. However, some international platforms do accept US clients so if you are a USA-based trader then you will need to search for suitable brokers. The Australian Securities and Investments Commission (ASIC) has matched the rules imposed by the ESMA on brokers for CFD crypto trading.

CFD crypto trading platform

Trading Tips

Build Experience

Make use of the demo accounts made available by the brokers to understand how CFD crypto trading markets work and to see the impact that leverage has on your trade. The multiplication of gains on successful trades that leverage can produce may make it tempting to keep going as high as possible but you should be careful that you understand the risks.

Demo accounts can also help you choose a broker by trialling their systems, trading platforms and fee structures before opening a live account. Additionally, you can explore new markets and test or refine strategies without risking real money.

Education & Advice

Some brokers will offer advice and trading guides that can guide you towards more successful and better-informed trading. In addition, there are plenty of courses, forums, blogs, videos, books, ebooks and tutorials you can find online that all provide you with information to make potentially better predictions on crypto prices.

Stick To Your Plan

CFD crypto trading can quickly turn into an emotional exercise with the volatile markets causing big price swings in both directions. It is important then that you stay level-headed and think things through before making any potentially rash trade decisions. See our page on successful trading personalities for more information.

Keep A Journal

Note down any and all information related to your CFD crypto trading before, during and after making your trades. This includes entry price and time, targeted closing price, losses you would tolerate, exit price and time, why you made this trade and what you learnt from the trade. This information can help you spot patterns in the future and to identify what strategies or decisions were successful or unsuccessful.

Final Word On CFD Crypto Trading

CFD crypto trading is a high-risk, high-reward activity that allows you to speculate upon both the successes and failures of cryptocurrencies and decentralised finance endeavours for your own financial gain. The instruments are highly regulated given the risks they impose, though there are many risk management strategies you can implement to try to counteract this. If you wish to get involved with CFD crypto trading, be sure to do your due diligence, trial out brokers, assets and strategies in a demo account before staking real money and follow our guide above to find the best brokers.

FAQs

What Is A CFD?

A contract for difference (CFD) is a trade agreement between two parties where the pay-out is dependent on the difference between the price of the asset at opening and at closing. From a trader’s point of view, they can make money from an asset price decreasing or increasing by purchasing the correct type of CFD (long or short).

Is Crypto Trading A CFD?

Not all crypto trading involves using CFDs, but it is a popular option for those that don’t want to physically own any tokens themselves. This reduces the risk of having a digital wallet hacked but can incur additional trading charges.

What Time Does Crypto CFD Trading Cease?

As cryptocurrencies are not traded on one specific regulated exchange, they are open to trading 24/7, all year round. There are times of higher and lower market activity that will often follow the peak trading hours of popular physical exchanges, which can affect profits through slippage and volatility.

What Cryptocurrencies Can I Trade CFDs With?

Typically, it is only the cryptos with the biggest market capitalisation that brokers will offer CFDs for. These include Bitcoin, Ripple, Ethereum and Litecoin.

What Does Margin Crypto Trading Mean?

Margin trading involves leveraging your investment with a loan from your broker to take out a CFD much larger than you have the money for. That is, you stake only a portion, or margin, of the total position size. For example, if a trade worth $100 has a margin of 5%, then you only need to pay $5 to enter the CFD. This system can let you make much larger profits than otherwise, though it can also cause you to lose more money than you invested.

Further Reading