What Is Crypto CFD & How to Trade Bitcoin CFDs?

Crypto CFDs are financial derivatives that allow traders to speculate on the price movements of cryptocurrencies without owning the underlying assets, like Bitcoin or Ethereum. Unlike traditional investing, CFD trading enables users to profit from both rising and falling markets.

Cryptocurrency has evolved beyond simple buying and holding, with traditional financial instruments like contracts for differences (CFDs) gaining prominence in the crypto space. Still, there is a lot of confusion when it comes to CFDs, as many investors don’t know exactly how they work, what their benefits are, and how to trade them.

In this article, we’ll delve into the intricacies of crypto CFDs and answer the most common questions surrounding this popular financial instrument. In addition, we will explain how to trade Bitcoin CFDs, including what leverage to use and which trading platform to choose.

What is CFD in crypto?

Contract for difference (CFD) in the context of crypto refers to a financial derivative that allows traders to speculate on the price movements of cryptocurrencies without actually owning the underlying assets. When you enter into a CFD, you are essentially making an agreement to exchange the difference in the price of a cryptocurrency from the time the contract is opened to when it is closed.

One key aspect of CFD trading is that you don’t own the cryptocurrency itself; instead, you are speculating on its price movement. This means you can profit from both rising and falling markets. When you open a CFD position, you choose whether to go long (if you expect the price to rise) or go short (if you expect the price to fall).

CFD positions can be held for as long as you want, provided you can meet margin requirements. They are typically used for short- to medium-term trading. They are highly flexible and can be used for various trading strategies, including day trading, swing trading, and hedging. Costs associated with CFDs typically include spreads (the difference between buy and sell prices) and overnight financing charges for positions held overnight.

How to trade Bitcoin CFDs?

In the following sections, we are going to show you how to get started if you want to trade Bitcoin-based CFDs.

1. Choose a reliable CFD trading platform

Selecting a reliable and easy-to-use CFD trading platform is paramount. Check our list of the best CFD trading platforms for information on the best platforms in the market, including their fees, features, supported CFDs, and more.

eToro is one of several popular choices for crypto CFD traders.

2. Create an account and deposit funds

Proceed by opening an account and depositing funds. CFD brokers require you to complete KYC before you can start trading CFDs, so keep that in mind.

Open an account on eToro

3. Search for Bitcoin CFDs

Find Bitcoin CFD either by using the universal search or by navigating to the cryptocurrency CFD section.

4. Decide to go short or long on a CFD trade

After selecting Bitcoin CFD, you will need to select whether you want to go short or long on a trade. In short, if you believe the price of Bitcoin will go up, go long, and if you believe the price of Bitcoin will drop, go short.

5. Set your leverage

Select your leverage level. Most platforms offer anywhere from 2x to 30x leverage for CFD instruments. Keep in mind that higher leverage comes with higher risk.

6. Place a CFD trade on Bitcoin

Once all the parameters are set, place the Bitcoin CFD trade. The position will remain open (and incur fees) as long as you are willing to cover margin and governing costs. 

FAQ

Why are CFDs illegal in the US?

CFDs face regulatory restrictions in the US due to concerns about their speculative nature and potential risks for retail investors. The US Securities and Exchange Commission (SEC) explicitly prohibits domestic and foreign platforms from offering CFDs to US users.

What are the benefits of crypto CFD trading?

Crypto CFD trading allows investors to speculate on cryptocurrency price movements without owning the assets. It offers flexibility to profit from both rising and falling markets and magnify market exposure using leverage.

What is the difference between CFDs and futures?

While both involve speculating on asset prices, CFDs and futures differ in their structure. CFDs are more flexible, enabling traders to enter and exit positions without an expiration date. Futures contracts have set expiry dates and standardized terms.

Can you lose money on CFDs?

Yes, you can. CFD trading carries inherent risks, and losses can exceed the initial investment. Traders should be mindful of market volatility, use risk management strategies, and understand the potential downsides before engaging in CFD transactions.

The bottom line: Crypto CFD trading allows investors to profit from both positive and negative market movements

Crypto CFD trading, especially in Bitcoin, offers unique opportunities and challenges. Success requires a deep understanding of the market, disciplined trading strategies, and continuous learning. If you are planning to use high leverage when trading CFDs, you can try out various scalping strategies, which can be lucrative in some cases.

If you want to trade physical digital assets, consider using dedicated cryptocurrency exchanges or use the best exchanges for futures trading if you want to trade derivatives other than CFDs.