Introduction
Crypto CFD trading is the trading of cryptocurrencies on a forex/CFD broker platform. Contract for Difference (CFD) trading allows a trader to speculate on rising and falling prices of a selected cryptocurrency without actually owning the coins. This means that the trader makes profit based on the price changes of the crypto asset only. The trader can also incur losses when the market moves against any trade positions taken.
Where Can Crypto CFDs Be Traded?
Several forex/CFD brokers offer cryptocurrency trading on their trading platforms. The most popular cryptocurrencies available for trading are Bitcoin, Ethereum, Litecoin, Ripple and Dash coins. Some popular brokers that offer crypto CFDs are XTB, Plus500, Etoro, Avatrade, FXCM, etc. These brokers offer the cryptocurrencies along with other assets for trading on their platforms.
Fiat currencies are used to open trading accounts with crypto CFD brokers. The trading is actually done with a base currency. The base currency is the account currency and the commonly offered base currencies are USD, EUR, GBP or JPY. Some other currencies such as the Ruble are also used, and the availability of each will depend on the individual broker. A few brokers also accept cryptocurrencies for deposits into the trading accounts. Every broker has at least one trading platform on which the crypto trading can be done. Generally, there are three types of trading platforms provided by most crypto CFD brokers. There are:
- Web Based Platforms: These platforms run on web browsers and are accessible online via a link from the brokers’ website. Examples are IRESS, Sirix, MT4 WebTrader, cTrader Web, etc.
Fig: Sirix Trading Platform from CM Trading Broker
- Desktop Client Platforms: These are platforms that are downloadable and installable on the desktop computers. Most of these application platforms support the windows operating system. Examples are MT4, MT5, Rumus, etc.
Fig: The MT4 Desktop Client
- Mobile Trading Platforms: Most brokers provide a mobile app downloadable on the android or iOS mobile operating system. This can be used to monitor market prices, perform analysis and trade on the go. Examples are MT4, Orex, ZuluTrade, Libertex, cTrader etc.
Fig: The OREX and the MT4 mobile trading apps
Real time ‘buy’ and ‘sell’ quotes are presented on the trading platforms. If a trader believes that the price of a crypto asset will go up, he places a ‘buy’ trade, but if he predicts that the price will fall, he places a ‘sell’ trade. Pending orders can also be used. This enables the trader to instruct the system to place a trade when a specified price is reached. The trading platforms feature tools for technical analysis which helps the trader to determine how and when to place his trades. There are complex and sophisticated platforms (like the MT5) loaded with tons of features that assist the trader in his daily activities. Several brokers also assist their traders by providing tools, analysis, market news and training.
Fig: Placing a crypto CFD trade order on the MT5 platform.
The Process
Step 1:
The first step to crypto CFD trading is to open and fund a trading account with a broker. This can be done by creating an account from a selected broker’s website. Click on “Create an Account” or on the appropriate button. A form displays prompting the prospective trader to input personal details such as name, address, phone number, email, etc.
Fig: Opening a Crypto CFD broker Account
More forms that collect information about the trader’s market experience, source of funds and risk understanding are presented. The account is normally opened within a few minutes or a day depending on the broker. “Know Your Customer” (KYC) verification is a regulatory requirement which must be fulfilled by all regulated brokers. It involves presenting a “Proof of Identity” and a “Proof of Address”. The prospective trader is required to scan and upload his government issued valid id card as well as a utility bill issued within the last 3 months. Once the account is opened, the trader can download the trading platform or login to the web trader depending on availability or trader’s preference.
Step 2:
The next step is to make a deposit. There are various payment options available depending on the broker. Generally, there are three groups of payment options. They are:
- Bank Transfers: This method involved fund transfers between bank accounts operated by the broker and that owned by the trader. It takes 3-7 working days to process bank transfers.
- Credit/Debit Cards: This is the most popular deposit option, and involves the trader using a debit or credit card to deposit funds into his trading account. The major cards (VISA and MasterCard) are accepted by most brokers. Card transactions are processed instantly and the transferred funds become immediately available for trading in the trader’s broker account.
- e-Payment Wallets: the most popular e-wallet payment options among brokers are Skrill, Neteller and WebMoney. Payments are processed instantly as it involves transfer between trader account and broker account with the same e-payment wallet operator.
Fig: Payment Options
Bank e-Payment solutions like Trustly, SOFORT, etc are acceptable by some brokers. Few brokers also accept deposits via Cryptocurrencies like Bitcoin, Litecoin and Ethereum. After depositing in the trading account, the money can now be used for crypto CFD trading on the trading platforms.
Crypto CFD trading can be lucrative as experienced traders can make a lot of money very quickly. But, it also involves risks. In fact, most brokers state it clearly on every page of their website that over 60% of retail investors’ accounts lose money when trading CFDs. This figure can be more than 75% with some brokers.
Fig: Risk Warning on Admiral Market’s Website. 83% of investors lose money.
Here are some risks involved with trading Cryptocurrency CFDs:
- Gapping: Prices fluctuate and can move quickly before a trade executes. This can lead to slippage resulting in trades executing at a different price from that specified by the trader. This can result into losses to the trader.
- Margin Trading: Virtually all the crypto CFD brokers allow traders to trade on a margin. The leverage is given as a ratio which can be as high as 1:200 depending on the broker. Trading on margin enables traders to open trades that are higher than their capital. This can help traders make more profits. But, it is also very risky because if the trade goes against the trader, huge losses can be incurred.
- Counterparty Risk: Sometimes, a broker executes a trade at a different price from the one specified by the trader because of execution delays. This often results into more expensive fills for the trader. There are times when brokers might not correctly implement a stop loss order and the trader suffers huge losses. Other brokers sometimes act against the trader by closing trades on their own without instruction from the trader. Brokers’ actions can result into huge losses to a crypto CFD trader.
To reduce the risks involved in trading crypto CFDs, adopt the following measures:
- Learn how to trade before trading. A prospective trader should take time to properly learn the act of trading, trading terminologies, strategies, fundamental and technical analysis etc.
- Choose a regulated broker. These brokers stick to the strict regulatory stipulations and thus, provide satisfactory services.
- Start with a demo account: This is a practice account provided by most brokers for testing and practice purposes. Create and test strategies on a demo account before going live.
- Start the live trading with small amounts. Always trade with a small percentage of your trading capital.
- The use of tools such as the ‘Stop Loss’ and ‘Take Profit’ settings must be deployed for effective risk management.
- Always use a trading strategy: Expert traders always use several tools to perform their analysis before making a trade decision. They also factor in broker charges, leverage and risk management into their calculations before entering a trade.
Crypto CFD trading is complex but can be learnt and perfectly executed with good training, experience and excellent risk management strategies.