What are Cryptocurrency CFDs?
CFD stands for Contract for Difference. A CFD is a financial instrument that gives traders exposure to price movements of an underlying asset (such as gold, bitcoin or shares), without the trader needing to hold the physical underlying asset.
CFDs are available for thousands of assets, covering commodities, cryptocurrencies, local and international stocks, ETFs and more.
Cryptocurrency CFDs give traders exposure to the price of cryptocurrencies without needing to hold cryptocurrency. For example, if you buy ethereum CFDs, you will profit if the price of ethereum increases, or incur a loss if the price of ethereum decreases, without ever actually holding ethereum.
Traders can buy and sell cryptocurrency CFDs from reputable CFD exchanges such as Plus500. Plus500 offers CFDs for several cryptocurrencies, including Bitcoin, Ripple, Ethereum, Litecoin and several others.
Problems with Cryptocurrency Exchanges
It might seem like the most natural way to trade cryptocurrencies is to use a cryptocurrency exchange. Which crypto exchange should you choose? A sleek trading platform, flashy marketing and good reviews say almost nothing about the security of a cryptocurrency exchange.
There have been countless examples of cryptocurrency exchanges having their customer funds stolen in hacks, and other examples of exchanges being outright scams.
Example of a Cryptocurrency Exchange Hack
Consider Liquid, a major Japanese exchange hacked in August 2021 resulting in $90 million of crypto stolen. Fortunately Liquid was able to withstand this blow, but many other exchanges are not so lucky. This list of cryptocurrency exchange hacks offers countless other examples (or Google "list of cryptocurrency exchange hacks").
Example of a Cryptocurrency Exchange Scam
Some cryptocurrency exchanges can be outright scams. QuadrigaCX was Canada's largest Bitcoin exchange. In late 2018, customers began to notice that they couldn't withdraw funds. Weeks later it was announced that the company's founder had died during a trip to India whilst suffering from bowl problems, possibly exacerbated by the exotic spices of the subcontinent. He took around 26,350 BTC of customer funds with him to the "after life", which could very well be somewhere in Saint Petersburg. He was the only person in the company who could authorize access to customer crypto. As mentioned earlier, the sleekness and popularity of a cryptocurrency exchange is no indication of its trustworthiness.
Once crypto has been stolen, it can be extremely difficult to track down the perpetrators and recover the funds.
When you trade, you entrust your hard earned funds with an exchange. It is important to know that the exchange is reputable and regulated, which basically means the exchange is watched over by government bodies who ensure the exchange handles your funds sensibly. Most cryptocurrency exchanges are not regulated.
What are the Advantages of Trading Cryptocurrency CFDs?
With cryptocurrency CFDs, neither you nor the CFD exchange handles crypto. You gain similar price exposure without the risk of a crypto hack hitting the exchange. Furthermore, many CFD exchanges are regulated in the countries in which they operate. For example, Plus500 is regulated in major jurisdictions including the UK, Singapore, Australia and several other countries.
Short Selling Crypto
If you think the price of a cryptocurrency will fall, you can benefit from this by short selling the cryptocurrency's CFD.
What are the Disadvantages of Trading Cryptocurrency CFDs?
With CFDs you do not own the underlying asset. This means you are not able to deposit or withdraw cryptocurrency with a CFD exchange.
What else should I know about Cryptocurrency CFDs?
CFD exchanges let you trade on margin. This means borring to trade, which can amplify gains but can also amplify losses.
For example, consider trading Bitcoin on margin.
- The price of Bitcoin is USD $50,000
- You buy 1 CFD Bitcoin on margin of 100:1. This means you are exposed to $50,000 worth of Bitcoin, but you only spent $500 (the rest was borrowed). In terms of price, its the equivalent of owning 1 BTC.
- Trading on margin can amplify gains: if the price of Bitcoin rises to $55,000, you will have made $5,000 profit from only trading $500. That's a return of 1000%.
- Under the same winning scenario, if you didn't trade on margin, you would have bought 0.01 BTC for $500 and sold it for $550, for a profit of $50 (a return of 10%).
Trading on margin can also amplify losses: if the price of Bitcoin falls to $45,000, you will have lost $5,000 from only trading $500.
Depending on your account balance, your position could get closed as the price falls, which would lock in the loss. Before the price gets too low, the CFD exchange will let you know that you can keep your position open if you deposit enough to cover the loss. This is called a margin call.
- Under the same losing scenario, if you didn't trade on margin, you would have bought 0.01 BTC for $500 and sold it for $450, for a loss of $50.
Trade Cryptocurrency CFDs
Practice trading with free virtual cash on a Plus500 demo account