In trading, CFD is short for contract for difference. It is a popular trading instrument that permits traders to invest in an asset without really owning that asset. In CFD trading, the trader and the broker agree to exchange the difference in the value of a particular currency, share, commodity, or index between the opening and closing of a trade. By nature, CFDs allow investors to buy and sell a contracted number of shares in a particular stock at a specific price for any time without any physical delivery of the CFD contract. These products are remarkably high-risk products. However, many investors care less about the speculation of these products as they tend to grow in popularity in the financial markets. In this article, we shall be looking at the concept of Bitcoin CFD trading. Read on.
Created in 2009, Bitcoin is a digital currency based on a decentralized technology for secure payments and storage of money without the involvement of banks or the use of an individual’s name. As with any other currency, bitcoin has its value, and this value can be affected by demand and supply.
Bitcoin Contract for Difference
CFD (Contract for Difference) is a derivative trading instrument where you don’t have to own the underlying asset, but instead, you trade on the price of the asset. It operates just like conventional trading where if you open a buy/long term position, and the market price of the asset climbs, you will make a profit. If you open a sell/short term position, and the price drops, you will make a profit. This advantage is one of the biggest perks of the CFD because when you are investing in bitcoin during the exchange, you can’t sell, you can only sell what you own. So, first, you will have to buy it. But in CFDs, you can sell if you think the price will drop to buy back when the price drops or close a trade and make a profit in down movement.
CFDs have been around for quite a long time and are a popular investment product. The difference that has made bitcoin phenomenal to CFD traders is that bitcoin has high volatility, the potential to make profits both in bull or bear markets, and its flexible leverage. CFDs allow traders to buy or sell without much worries about what the long-term value of bitcoin will be.
How to calculate the bitcoin CFD margin
Margin is essentially the money you borrow; it is what allows the CFD trader to trade on leverage.
For instance, if you are trading on $15,000 of stock via a CFD and the CFD provider has set a margin of 10%, then you would require margin or collateral of $1,500 in your account.
To calculate your initial margin: quantity × price = Full Notional value
Margin required = Full Notional value × Margin percentage
So, if for example you want 1000BTC and its $10 each, Full Notional value will be $1000 × $10 = $10,000. If the margin percentage is 5%, then the initial margin required will be 5% × $10,000 = $500.
It is safe to conclude that trading on CFDs has advantages. However, beware that margin trading has two sides: While you can magnify the potential profit because you haven’t paid the full stock price for your CFD position, conversely, the loss is also potentially higher. Margin exposes the trader to the peculiar risk of payment of interest for the use of borrowed money.
Bitcoin CFD trading
Bitcoin CFD provides traders with the opportunity to speculate the price of the market and make profits on massive price movements without having to own or store bitcoin securely. Another benefit of the contract for difference trading is that traders can sell or buy bitcoin at exchange prices. Trading in bitcoin directly means you would have to sign-up to exchanges or purchase bitcoin at a mark-up from the market price. You can buy or sell at the market price and gain more from large swings in either direction.
Bitcoin CFD makes it easier to open short trades. If you believe that the price of bitcoin will drop, you can short the currency by opening a sell/short trade. You cannot do this when you hold actual bitcoin. As a trader, this gives you much more flexibility when it comes to your trading strategy. Generally, execution speed is extremely fast with CFDs. Exchanges rely on volume, such that when fewer people are trading, there would be more open orders. Brokers, on the other hand, are plugged into liquidity providers, which offer guaranteed and often instant execution.
The ever-increasing availability of information on bitcoin has created significant interest in the value of the currency. However, it has also spread uncertainty. The trading market in the cryptocurrency can fluctuate significantly depending on the nature of the information circulating on social media.
A hack, for instance, can seriously lower the price of bitcoin in the fiat currency. This theory explains why social media news plays a critical role in the pricing and valuing cryptocurrency like bitcoin. The rate of exchange and speed of information give traders the benefit of exiting the market before losing big on their investment in Bitcoin.
Bitcoin contract for difference allows you to trade movements in the price of bitcoin without owning or purchasing bitcoin. It takes care of all the worry about security issues regarding bitcoin, such as encrypting your wallet, downloading a backup, etc. when trading contracts for difference, there is a need to purchase the underlying asset. This method makes investing in bitcoin safer for those who worry about the security of bitcoin or do not want to set-up a wallet and purchase bitcoin.
Trading bitcoin CFDs is much more convenient than dealing directly with the currency. If you want to buy bitcoin directly, you have to be worried about security issues such as encrypting your wallet, keeping a backup, etc. and you still wouldn’t profit directly on a fall in value. As always, the bitcoin contract for difference presents a tax-efficient means of profiting from the change in the value of a financial instrument without ever having to buy an asset.