When they first started out, people were highly skeptical of cryptocurrency. They thought it would only make an impact for a short while then disappear. However, with time, people have realized that these assets are here to stay. Most of their values have really gone up. While many people prefer to trade using crypto pairing, some prefer to use conventional (fiat) currencies. In such an instance, you can use the help of instruments such as Contracts for Difference (CFDs). It’s important to note that unlike other cryptocurrencies, CFDs are traded over the counter. Since the government regulates all exchanges, trading in CFDs is currently prohibited in Belgium and the United States. Because of this, the high regulation costs that many of these brokerages avoid setting up shop in the United States.
What is a Contract for Difference (CFD)?
In a nutshell, this represents a contract between a brokerage company and a trader. This helps the trader take advantage of price movements in various cryptocurrencies without having to purchase the digital currency. Therefore, a trader can make money off speculation and get some money from the difference between the entry and exit prices. Not only is this favorable for people who don’t want to actually purchase or store these digital assets, but it also helps in eliminating the security aspects that have to be looked at if you are storing digital assets.
CFDs are a favorite for many brokerages around the world because of their simplicity and real-world gains. What’s more, they are very flexible. When trading in CFDs, you have the freedom to open and close long and short positions whenever it is necessary. Although you might lose some money in some instances, it’s always a lesser percentage than what it would have been. Another great advantage of dealing with CFDs is that their fees are relatively lower than the competitions. This means that you get to make more money while paying less to do so.
Limitations of CFDs
Although trading in CFDs has its benefits, it’s not all sunshine and rainbows. Why? In CFD trading, holding an active position overnight will cost you something known as a “premium”. In most cases, this represents 0.1% of the size of your position. This amount will be continually deducted every day so long as the position is maintained. Since you can also use leverage in CFD trading, you can maintain a position for as long as it takes. During this time, only the interest will be paid out.
What’s more, the brokerage company you are using will likely charge you a “spread” fee, which covers every instance you open a position. Also, most brokerage companies will also want to protect themselves from sudden unexpected moves on the part of the market. This means that on a day where trading is at its peak, high market volatility, and high leverage, they might seek to drastically move against a trader. In some cases, this might leave a trader in the red.
Instead of investors purchasing cryptocurrencies in the hope that their value will increase, they can now invest in their futures and potential. Although this type of trading hasn’t been around for a while, its profit margins are very impressive. As cryptocurrencies further attain fame and support, so will this type of trading. Regulators haven’t permitted this type of trading but it’s been very lucrative. Although there is a learning curve to this sort of trading, it’s often a very rewarding one.