Cryptocurrency CFDs are a financial instrument that allows you to trade on the price movements of digital currencies without actually owning them. A cryptocurrency CFD is a contract-for-difference (CFD) that mirrors the price changes of an underlying cryptocurrency asset, such as Bitcoin or Ethereum. When you trade cryptocurrency CFDs, you speculate on whether the underlying asset’s price will rise or fall.
Cryptocurrency CFDs are a leveraged product
Opening a trade does not need a large deposit, as is known in the business. It lets you take a position on the underlying market without tying up significant cash.
On the other hand, leverage magnifies losses when the market moves against you, and your investment decreases more than your initial deposit. That is why employing stop-loss orders while trading cryptocurrencies CFDs is so crucial. A stop-loss command immediately ends your trade at a specific price to avoid wasting money if the market turns against you.
Cryptocurrency CFDs are traded on a margin
You only need to put down a small deposit – or margin – to open a trade. For example, if BTC is trading at $10,000 and you want to buy $5,000 worth of Bitcoin CFDs, you would only need to put down $250 as a margin (or 2.5%).
You can take a position on the underlying market without tying up significant capital. However, leverage also magnifies your losses if the market moves against you, so it’s crucial to use stop-loss orders when trading cryptocurrency CFDs.
How do I trade cryptocurrency CFDs?
You can trade cryptocurrency CFDs with IG by opening an account and adding funds. Then search for the market you want to trade, such as BTC/USD, and click ‘buy’ or ‘sell’.
If you want to go long (buy) BTC/USD, click ‘buy’. If you think the price will fall, click ‘sell’. You can then set your stop loss and take profit levels – plus add trailing stops and limits if you wish – and click ‘open trade’.
Your trade will then appear in your deal ticket over on the right-hand side of the screen. Here you can see your entry price, stop loss and take profit levels, and your current profit or loss. You can also close your trade early by clicking the ‘sell’ button in your deal ticket.
The difference between cryptocurrency and digital currency?
A digital currency is a type of money that exists solely in electronic forms, such as Bitcoin or Ethereum. A cryptocurrency is a type of computer currency that uses algorithms to secure transactions and limit the production of new units. Cryptocurrencies are not governed by government or financial institutions and are therefore decentralized.
Bitcoin, the first and most well-known cryptocurrency, was launched in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
How are cryptocurrency CFDs priced?
The price of a cryptocurrency CFD is based on the underlying market price of the digital currency. For example, if BTC is trading at $10,000 and you open a long BTC/USD traded with a leverage of 10:1, you will only need to put down $1,000 as a margin.
Your position size would be ten times the amount of your margin, or $10,000. So, if the price of BTC rises to $11,000, your profit would be $1,000 (10% of $10,000). However, if the price falls to $9,900, you would lose $1,000.
What is the difference between a stop loss and a limit order?
A stop-loss closes your trade at a set price –helping you limit your losses if the market moves against you. A limit order is an order to buy or sell a security at a specific price.
A limit order would give you more control over your trade. For example, let’s say you place a buy limit order for BTC/USD at $9,800. If the market falls to that level, your trade will be automatically executed at $9,800. However, if the market doesn’t fall to that price, you will not execute your trade.