The popularity of cryptocurrency, particularly bitcoin, has seen steady growth over the last decade. Nowadays, crypto investors are filling their digital wallets with these fascinating coins.
But the truth is that cryptocurrency is still widely considered a speculative asset which makes some investors reluctant to diversify their portfolios with Bitcoin. However, that doesn’t mean you have to completely ignore cryptocurrencies given their growing acceptance. So, if you don’t want to buy and sell bitcoin, what you can do is trade bitcoin CFDs instead.
What is a Bitcoin CFD?
To understand how bitcoin CFDs work, you first have to know what a CFD is. It stands for a contract for differences, which is simply a financial agreement between two parties that allows you to bet on the price movements of an underlying asset.
In this case, that asset is bitcoin. Bitcoin CFDs differ from traditional exchanges in that you don’t actually own the digital asset. When you open a contract, you’re making a prediction on the price movement of bitcoin. You then generate a profit if your forecast is correct.
For example, if you think the value of bitcoin against the US dollar will grow. This is known as taking a long position. If the price of bitcoin does increase during the term of your contract, the profit you earn comes from the difference in value or the spread. Conversely, you can take the short position by betting that the value of bitcoin will decrease over time. In this instance, you still generate returns from the spread.
Weighing the Rewards and Risks
Given the volatility of bitcoin, or cryptocurrencies in general, trading CFDs instead of the actual asset is a major advantage. Even if the asset depreciates, you can still turn a healthy profit if you picked the right position.
Trades are also executed instantaneously compared to doing a bitcoin exchange that is sometimes a slow and confusing process. The point goes to CFDs because in a fast-paced environment like crypto, you need to move just as fast.
And even if you don’t have a lot of capital to work with, you can open a trade and increase your exposure through leverage. Think of it as borrowing capital from a broker which will allow you to make bigger and potentially more rewarding moves. It’s actually what makes bitcoin CFDs more accessible to traders given that exchanging actual bitcoin requires a bigger capital with no leverage.
However, the possibility of a high reward comes with an equally high risk. While it can amplify your returns, trading CFDs on leverage can also increase your losses. You might end up overtrading just to recoup some of your losses and enter a downward slope.
But as with any form of investment, there are ways to manage these risks. Trading bitcoin CFDs come with various tools, like ‘Close at Profit’ and ‘Close at Loss’ orders which put a cap on your trade at a predefined rate. While you do end up putting a limit on how much you can earn, you also automatically keep your losses within certain boundaries.
That said, bitcoin CFDs, while more accessible to traders with low capital require constant monitoring. Even with automatic orders in place, you still need to regularly track the price movements of bitcoin as well as the factors that affect it. That’s how you can make your predictions more accurate and work the price shifts to your favour.
Bitcoin and the greater cryptocurrency landscape are constantly changing. So keep track of all the latest cryptocurrency news here.