Steemit Crypto Acdemy Season 2 Week 2 Homework Task By @abdulhalim100: Cryptocurrency CFDs Trading
Greetings to all the lovely members of steemit. It is an honor to be part of this great platform. As we are continuing our weekly lectures in the steemit crypto academy. It is yet another week and another interesting lecture by professor @kouba01 on “cryptocurrency contracts for difference” (CFDs). I have learn a lot on this nice topic and I am here to present my homework task on this interesting topic.
To begin with this homework task on the CFDs, I think it is very necessary for us to take a good look at the cryptocurrency just to get a little understanding about it and the market as well.
The cryptocurrencies are digital currencies which can be used to make payments online for good and services. Many firms have spread their own cryptocurrencies often known as tokens into the crypto market to be used as a medium of exchange for goods and services that the company provides. To get a cryptocurrency, one have to exchange the real currency for it.
These cryptocurrencies only functions under a technology called blockchain. This blockchain is a decentralized system spread around many computers that controls and save transactions. Some investors wish to generate profit from the change in the price of a cryptocurrency without possessing any assets, investing CFDs on cryptocurrencies can be an interesting choice. Now lets take a look at what cryptocurrency CFDs are.
Question 1
The term CDF simply means Contract For Difference. It is a covenant between investors (buyer and seller) that guarantee that the buyer must pay the seller the difference between the current cost of an asset and its cost at covenant time. CDFs creates opportunities for investors to profit from price movement without owning the basic assets. The asset’s basic cost does not depend on the cost of a CDF contract, it is only the price which changes between the trade entries and exits.
Investing in CFDs gives many merits that have increased the device massive popularity in the past years. In CFD trading, the buyer and the seller both agree between themselves to repeat market conditions and settle the difference among themselves when the position ends.
Cryptocurrency CFDs enables its investors to hypothesize on the cost of a cryptocurrency pair, such as the following;
1. Bitcoin going with U.S dollar BTC/USD
2. Ethereun going with the U.S dollar ETH/USD
3. Litecoin going with the U.S dollar LTC/USD
4. Bitcoin going with Ethereum BTC/ETH
If an investor thinks the cost of a cryptocurrency will rise then he can go long term and the vice versa. With this an investor is entitled in making profit both in the rising and falling in the markets as well. Leverage is one of the important concepts an investor needs to know before trading cryptocurrency CFDs, it is both a key merit and demerit of this type of by-product. In opening a CFDs trade an investor only need to deposit a small amount of the trade’s general cost.
This could be 15%, 10% or even less than the general transaction amount and this is known as the margin demand. Meaning if an investor is opening a trade worth BTC 1000, he may only need to pay a deposit of BTC 500. Although, he can still get 100% returns if the price moves the way he predicts.
An investor is entitled to some advantages when trading with the cryptocurrency CFDs, and below are some of the advantages;
1. An investor has high opportunity of gaining during both positive and negative phases of the market.
2. Again, purchasing cryptocurrencies are made easy and there is no need to go through those complicated process in getting tokens into your account.
3. An investor also has the opportunity to trade the cryptocurrency basic CFDs with his fiat currency.
Likewise the advantages of trading cryptocurrency CFDs, there disadvantages as well in trading cryptocurrency CFDs and below are some of them;
1. Leverage is one main disadvantage of trading cryptocurrency CFDs because when an investor is using leverage, they run the risk of growing his losses as well as your profit. This is due to they calculating the outcome on the full size of the position and not the actual amount invested. Meaning your losses are deepen as much as your profits. Therefore, it is always advisable to do some research on the leverage ratio when trading CFDs.
2. Another disadvantage of trading CFDs is that, an investor can lose much of his investments if the margin trading effects are managed poorly.
Question 2
Because cryptocurrency CFDs allows you to profit from a highly unstable asset price changes, traders think they are suitable for all of them. To know whether trading CFDs with cryptocurrencies fit your trading strategy you must follow the below stated points;
1. You must find exposure into the crypto-asset market with no tokens on you.
2. Also, you have to have in mind that buying cryptocurrencies is very expensive to your opinion.
3. You should also be targeting both high and low rates of cryptocurrencies.
4. You should also locate and follow an investment to make immediate wins on small price changes.
5. You should also engage in risk taking and trading in annoying environments.
6. You should also want to use a low initial capital to profit from trading on margin.
Question 3
Yes CFDs are risky financial products. Although, there are advantages of CFD trading yet it has several risks types that are often overlooked with regards to the crypto market. Some of this risks are; client money risk, market risk, counterparty risk and many more. Let’s start with the counterparty risk .
Counterparty Risk
A counterpart is the firm that gives assets in a financial transaction. When trading a CFD, the only asset being traded is the contract given by the provider of the CFD. With this, it exposes the trader to other counterparts of the provider. The risk behind this is that, the counterparts fails to accomplish its financial agreements.
The value of the basic asset is no longer important if the provider is unable to meet the agreements.
It is essential to know that the CFD managements is not highly controlled and the dealer’s chance is based on reputation and financial state rather than authority standing. There are so many CFD dealers in the system but you need to investigate about the dealer’s background before opening an account.
Market Risk
CFDs are by-product assets that a trader uses to guess on the trend of basic assets. An investor will choose a long state if he believes a basic asset will rise and the vice versa. Every investor hopes that the cost of the basic asset will move in the direction that will be favorable to him and in reality even the expert investors can be proven wrong.
Policies from the high authority can result in immediate changes in the market conditions. Small amendments may have big impact on returns due to the nature of CFDs. Unfavorable effect on the cost of basic asset may lead to the provider demanding for a second limit payment and if the limit calls cannot be met, then the provider may have to sell at lose.
Client Money Risk
Some countries legalize CFDs and implement client money protection laws to protect the investor from possibly harmful practices of CFD providers. By law, funds transferred to the CFD provider should be restricted from the provider’s funds in order to prevent the provider from shuffling their own investments.
When investors agreed on a contract, the provider removes an initial limit and has the right to ask for further limits from the merge accounts. In case the other client involved in the merged account fails to meet the limit calls then the CFD provider has the authority to draw up from the merge account with potential to affects returns.
Question 4
In fact, the valuation of a cryptocurrency CFDs depends on the dealer you trading with, as discussed in this week’s lecture on cryptocurrency CFDs. It was illustrated that some CFDs offered by Ethereum broker was seen to be 1 dollar. And for some instances too, one can invest without having to pay charges to a centralized exchange. So for that matter I will say it depends on the broker one is dealing with. Some of them offer cryptocurrency CFDs and others don’t.
Question 5
Step 1.
I search for avatrade on Google and visit their homepage with the link below.
https://www.avatrade.com/
Step 2.
I clicked on the register now to sign up.
Step 3.
I entered my details and clicked on the create account.
Step 4.
My accounts was opened after pressing on the create account button.
Step 5.
I then open the menu page of the site, and click on switch account to change to demo account.
Step 6.
With the demo account opened, I searched the type of cryptocurrency I wanted to buy which is Ethereum (ETH).
Step 7.
I then proceeded to indicate the amount of Ethereum I wanted to buy in the amount section which was 50.
Step 8.
After indicating the amount of Ethereum currency, I then click on buy to confirm my transaction.
Step 9.
To sell the Ethereum currency just follow the same process again to do so but in step 8 instead of clicking on buy you rather click on sell.
I will like to conclude by saying that cryptocurrency CFDs are well known in the system due to their importance to investors in generating profit within a short period of time. And also investors should be aware of the risks of cryptocurrency CFDs trading which are very much higher and can cause an investor to face potential loss than his initial investments.
Thank you all for going through my post.
Hello @abdulhalim100,
Thank you for participating in the 2nd Week Crypto Course in its second season and for your efforts to complete the suggested tasks, you deserve a 7/10 rating, according to the following scale:
My review :
An article with a lot of generalities, in fact, to answer the question you have to start with your opinion, then analyze the idea and come to a conclusion. For every clear effort to try to understand the topic, and thank you for posting your experience on the platform avatrade.
Thanks again for your effort, and we look forward to reading your next work.
Sincerely,@kouba01