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There has been a surge of interest in cryptocurrencies over the past few years. That demand has led to many CFD trading platforms and brokers now offering cryptocurrency trading pairs. These trading pairs can include one cryptocurrency, for example, Bitcoin, and one fiat currency, such as the US dollar. Here the trader makes a profit, or loss, by forecasting whether the cryptocurrency side of the pair will gain or lose value against the fiat currency.
The other kind of cryptocurrency pair is made up of two different cryptocurrencies, for example, Bitcoin and Ethereum. In this case, the trader makes a profit, or loss, by forecasting whether the leading cryptocurrency of the pair will gain or lose value against its cryptocurrency partner.
In that respect, trading cryptocurrency CFD pairs work in the same way as trading CFDs on forex pairs. In a more general sense, trading cryptocurrency CFDs is executed in the same way as trading CFDs on other, more traditional asset classes like commodities, stocks or stock market indices in that a trader speculates on the price movements of their chosen instrument.
So, why would a CFD trader choose to trade specifically on cryptocurrencies, rather than traditional assets? Let’s take a look at some of the most common reasons for trading cryptocurrency CFDs.
Cryptocurrencies have been around since Bitcoin, the original cryptocurrency, launched in 2009. However, only in the last 3 or 4 years they have developed from something with a limited, niche following of mainly tech enthusiasts into a new asset class that promises to carve out a long term and important role in mainstream financial markets.
Cryptocurrencies are seen as a ‘disruptor’ which means they have the potential to fundamentally change how the financial market works.
When disruptive technologies succeed in fundamentally changing markets and also have a financial asset form, they are generally the assets that show the biggest gains in value over time. Ten years ago, Amazon’s stock was worth around $83; today the same stock trades for around $1,900. That’s an increase of almost 2,200% - a huge profit for early investors and one that almost only happens with disruptive technologies.
Some traders believe the ‘disruptive’ new technology of cryptocurrencies will fundamentally change money and commodity markets in the upcoming years; they are hoping for the kind of huge returns that early investors in promising tech stocks are hunting.1
There is an argument that some cryptocurrencies are more like commodities. An example of this would be the cryptocurrency Ethereum, which is not intended to be used as an alternative to money but instead pay for the use of its blockchain platform. The purpose of its blockchain platform is to build smart contracts. The price of commodities is influenced by global demand: for example, oil is used in fuels, plastics, and other materials so its price is influenced by global demand for products made from oil. The price of ‘utility’ cryptocurrencies, like Ethereum, is influenced by the use of the blockchain platform they are associated with.
Cryptocurrency traders often make their profits or sustain losses on shorter-term positions, rather than when they hold them over a period of 5, 10 or 20 years. They open and close positions to take advantage of price movements over weeks, days, hours or even minutes.2 Trading traditional asset classes over shorter time periods usually involves much smaller price changes than what would be seen over a period of months to years, but with cryptocurrencies being as volatile as they are it is not unusual to see massive price fluctuations in a much shorter period of time.
For most traditional assets it is very rare to see a 1% price movement in a single day. These movements usually only happen when something significant is happening in the market that dramatically changes investor sentiment. On the other hand, in the cryptocurrency market, it is relatively normal for individual cryptocurrencies to see their prices change by a few percentage points per day. When something significant happens in the cryptocurrency market, the price movements can be as much as 10% or more. This can potentially give traders many more regular opportunities to make significant profits from short term trades. Of course, this also makes trading cryptocurrencies riskier than less volatile assets, so traders have to be careful as significant losses can also be incurred.
Cryptocurrency volatility is another sign of their novelty as an asset class. As the market matures, it could be assumed that volatility will gradually drop to a level that would be expected of more traditional asset classes.
The chart above shows how the value of Bitcoin has increased from around $4,000 in early April 2019 to $9,000 in June 2019. That’s an increase of around 125%.
The chart below shows the price movement of Brent Oil, which by its usual standards had a particularly volatile few months over the first half of 2019. In April, its value was around $70 and in June it was $60. That’s a decrease of around 14.3%.
The difference is huge. And it’s those big, regular price swings that make trading cryptocurrencies so attractive to traders who wish to take advantage of the volatility.2
When trading CFDs, leverage is used to multiply exposure. For instance, if a chosen cryptocurrency CFD has a leverage ratio of 1:2 and the price moves 5%, the CFD trader will actually make a profit of 10% (or a loss of 10% depending on the direction of the price movement and the type of position the trader has selected). This means that CFD traders can make or lose significant amounts of money quickly.
When trading cryptocurrency CFDs, you don’t actually own the cryptocurrencies: rather, the trader speculates on their price movement. This means you are able to trade on the cryptocurrency market without the risk of a hacker breaking into your cryptocurrency wallet and taking your money. In addition, most trading platforms are SSL secured ensuring a safe environment for transactions.
When trading cryptocurrency CFDs it’s also possible to speculate on the falling prices of an asset, rather than relying on the value to increase. For example, a Sell position on a cryptocurrency CFD will profit when the buy rate of the cryptocurrency falls below its opening Sell rate, but will be in loss if the Buy rate rises above the opening sell rate.
Traders who believe they would be able to trade cryptocurrency CFDs are able to do so on the Plus500 trading platform. A strong selection of individual cryptocurrencies to USD, crypto to crypto cross pairs and even the popular Crypto 10 index are all available to trade as CFDs on their intuitive platform. After successfully opening a trading account, you can select the crypto CFD instruments you would most like to trade and get started.
1 Past performance is not a reliable indicator of future results.
2 Please check your platform’s scalping policy.