CFD could be a very foreign word for a crypto trader, but for traditional market traders, it is one of the most useful assets to trade with on different markets. CFD is an abbreviation for Contracts for Difference, which are basically assets that help you “buy a price” and not the asset itself. It may sound a bit confusing, but it is still quite easy to understand once you know the basics.

The primary difference between actual cryptos and crypto CFDs is the ownership. Meaning that when you are trading on a crypto exchange, you are using actual cryptocurrencies. But when you are trading crypto CFDs on a CFD broker’s platform, you are trading with the contract, meaning that you don’t actually own cryptos. Immediately it should spark some controversy as to why you should even consider such a trade, so let’s check out the advantages and disadvantages.

Crypto CFD: Advantages

Crypto CFDs are exclusive to CFD or Forex brokers. These companies are able to offer leverage on these assets, which is the primary reason why they are so attractive. For example, if I go to this CFD broker and engage in a $100 trade for BTC CFDs, I can then use a leverage of 1:100. Basically what that leverage does is increase the volume of my trade by 100, meaning I can now trade with $10,000 instead of $100. This, in the end, may earn me more than I would with my own assets. Basically, the broker lends you funds in order to increase your trades and thus your profits as well. Crypto exchanges rarely have this feature, which is why CFDs are not as well known among the crypto community.

Liquidity is also an advantage of crypto CFDs because they can be sold for fiat currencies, making them a lot more valuable.

Another small advantage is the lack of a crypto wallet, as there is no need for one. Therefore traders have all of their assets on one single platform, which helps the logistics. Unfortunately, this is where the advantages end and massive disadvantages begin.

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Crypto CFD: Disadvantages

Leveraging can be a double-edged sword. Although leveraging can offer bigger profits, it can also lead to massive losses, which may cause the trader to fall into debt with the broker. If you ever decide to engage in a crypto CFD trade with leverage, make sure to set a stop-loss on a point where you have half of your initial investment left. So if you invested $100 and got 1:100 leverage, you would have to set the stop loss at somewhere around $9,950 to avoid a complete zero-out of your account.

Another disadvantage is that CFD trades have deadlines. This means that when you place an order, that order will expire in a few days or so. This renders long-term investments completely useless. You could technically still do it, but the over-night fees for maintaining the position would just make it unprofitable. The over-night position is as it sounds, a position that lasts more than 24 hours, and it is usually accompanied by a fee.

Another disadvantage is that you don’t actually own cryptocurrencies, meaning that you cannot allocate them anywhere you like. For example, let’s say that there is a service that is only available in Bitcoin or Ethereum; you would not be able to pay with a Bitcoin or Ethereum CFD, because they are not real cryptos. Furthermore, the allocation may become a problem as a broker’s policies may change about crypto CFDs, which could stick you with the trade or force you to opt-out in an unprofitable position. With crypto exchanges, it’s different as you can immediately allocate the cryptos to another exchange’s account.

Conclusion

We have two very clear paths in front of us. Crypto CFDs come with advantages as well as disadvantages, so deciding how you want to proceed requires extensive research and comprehension. Hopefully this article can be a starting point to both.

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There are several ways to make money in the cryptocurrency market, and you have probably read about some of them. We have covered a few techniques on this platform too. In this post, however, I’ll explain some common trading methods you can begin using right away and give you a few tips for engaging safely in the market.

You must have heard some people refer to themselves as Bitcoin traders, but what exactly does that mean? These are some of the questions this post will try to answer.

How to Become a Bitcoin Trader

Bitcoin traders buy and sell Bitcoin with the motive of making a profit in the short term. They are mostly focused on the upward and downward movement of price rather than the fundamentals of the asset. There are many methods traders use to earn money in the market, but the two listed below are practicable for beginners.

Proprietary Trading

This is one of the simplest ways to earn from the cryptocurrency market. It involves you buying a portion of Bitcoin from a cryptocurrency exchange and selling it off when the price goes up. However, proprietary trading isn’t quite as easy as it sounds.

First, there are hundreds of cryptocurrency exchanges operating these days, and some of them are just pure scams. The critical thing you want to do then is to find the safest and most secure cryptocurrency exchange you want to use. And it is quite easy; you can ask people you know who already trade Bitcoin or check platforms (like Cryptocompare) that review cryptocurrency exchanges.

It’s also important to note that Bitcoin is extremely volatile. In other words, its price can experience sharp fluctuations in a short period. For example, the price of Bitcoin fell by about 35 percent in November alone. So, to be able to make some nice profit you have to learn how to anticipate the market correctly. Some experienced traders have identified specific patterns through the use of historical data that allow them to forecast and make a profit in the long run. So, in this case, you can choose to open a trading position and hold it open for a day, one week, or even for months depending on what the data shows.

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Market Making

A market maker is at both ends of a Bitcoin trade. Market makers earn their profits by providing liquidity for the market. They do so by creating limit orders in both directions; their profit is the spread on the bid and ask (Bid is a buy order while Ask is a sell order).

On an exchange like LocalBitcoins, for example, the price of Bitcoin could be at $3,000, so you would create a buy order for $2,999 and a sell order for $3,001. When both orders get filled, you earn $2 as profit. That seems small, but considering that you can keep doing this same thing over and over again and quickly get to 100 trades a day, it makes sense for many traders.

When Market Making Goes Wrong

Market making is profitable when Bitcoin has a relatively stable exchange rate. Let’s imagine the price of Bitcoin starts a sudden surge upwards; your buy order, the one that tries to buy low, might not get filled. However, your sell order will be taken at the price that you have set in advance, which means you have just missed the opportunity to sell at a higher price.

On the other hand, if the price takes a beating, as it did in 2013 when we saw the price of Bitcoin fall from $233 to $67 overnight (that’s a 71% drop), then your sell order might never get executed and you’ll be on the losing end if your buy order has already been taken up.

Critically, market makers increase liquidity on cryptocurrency exchange platforms, giving options for market takers to execute a trade immediately and therefore create a thriving marketplace.

There is a degree of risk attached to whichever method you choose to use. Taking a crash course on how to manage risks should, therefore, be the priority before you take a swing at trading Bitcoin.

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