Crypto Academy Week 10 - Homework Post for [@kouba01].Cryptocurrency Contracts For Difference (CFDs) Trading

Hi @kouba01, nice to greet you, my name is @allbert and this is the first assignment I do for your classes. First of all, I congratulate you for being chosen as a teacher, it is a joy to see how someone who started with me as a student is now a teacher.

You definitely deserve it, my friend.

Second of all, I must say that it was a wonderful class, and like such a good teacher, you have demanded the best of me for the realization of this post.

So let's begin.

_{Image edited by me in Powerpoint}

What is a cryptocurrency CFD?

These are contracts that allow investors to trade without owning the assets, based on the prediction and speculation of the behavior of the price of the asset, in this case, cryptocurrencies.

In CFD the level of profit is not given by the price of the cryptocurrency itself, but by the difference between the initial price at which the contract was generated and the level at which the cryptocurrency has increased or decreased at the time of closing the contract.

We could compare it as a kind of bet that is made in agreement with a broker (hence the word CONTRACT) as to the expected behavior of the cryptocurrency. So it allows you not only to make money in case the price goes up, but you can also choose to make money if the price goes down.

In the contract, several things are agreed upon, such as the type of cryptocurrency (underlying asset) on which the contract will be made, the decision on whether the price will go down or up, and the price of each contract, which will define how much will be gained or lost for each point that the price of the asset goes up or down. Additionally, the Leverage and the amount of the investment are agreed upon.

How do I know if cryptocurrency CFDs are suitable for my trading strategy?

Actually, the answer to this question lies within yourself, as it depends on the style of investor you are, as well as your personality. If you consider yourself a long-term investor who likes to buy low, hold and wait for the price to rise, this is not the best strategy for you.

In other words, if you don't like strong emotions, maybe these contracts are not for you.

However, if you consider yourself a short-term investor, who takes advantage of sharp changes in cryptocurrency prices, these contracts may be for you. Since we are talking about a very volatile market.

In itself, the cryptocurrency market is volatile, and doing it through CFD adds more volatility, so you can make daily operations and perceive large profits due to the volatility of the downward and upward movement of cryptocurrencies, powered by the leverage of the contracts.

People who trade cryptocurrency CDF must be focused on making timely moves, so they cannot disengage from their investment and wait, but must constantly check economic news, activate alerts, be attentive to charts and market movements.

A CFD trader should definitely have a strong stomach.

Are CFDs risky financial products?

Yes, of course, they are, since CFDs have an element called Leverage, which in the first place allows generating big profits with a small investment, but hold on...!

However, this same characteristic makes that the losses are multiplied or rather maximized, making the operations quite risky.

On the other hand, another characteristic of when a cryptocurrency CFD is made is that if the prediction is wrong and the contract is closed, not only the initial investment is lost, but you could owe extra money to the broker. You can lose more than you had.

Cryptocurrency CFD trades are very volatile, so along with the great opportunity to make large profits in a short time, there is also the risk of losing a lot in a short time.

Do all brokers offer cryptocurrency CFDs?

No, because this requires an additional service which not all are willing to offer.

The brokers that do operate with cryptocurrencies do not really have a cryptocurrency portfolio, they do not have the cryptocurrencies on which the contracts are made, therefore they must make additional operations to access other exchanges to obtain cryptocurrencies with the money that the investor paid in the contract.

After performing the operation in the Exchange and having the cryptocurrencies the broker reports them to you on Its platform.

Another reason is that due to the volatility of cryptocurrencies, traditional brokers cannot apply the leverage rates they would normally use in contracts with other underlying assets. They must apply lower leverage.

For these reasons, and for having to make an extra operation, not all brokers operate with cryptocurrencies.

How can you trade with cryptocurrency CFDs on one of the brokers? (Using a demo account).

This part was more difficult than usual for me, as most of the well-known brokers like eToro and Plus500 do not operate in my country. It was impossible for me to access their web pages. However, this mishap allowed me to explore other options until I found an excellent one.

I am referring to XTB's xStation 5 Platform.

_{XTB & xStation 5 Logos. ^Source}

If you don't know them, XTB is the broker and xStation 5 is a trading platform designed to access and trade multiple financial markets, including cryptocurrencies through CFDs.

" The xStation 5 is the own trading platform of the international broker XTB. This company is multi-regulated all over the world and listed on the Polish stock exchange.." ^Source

A free demo account can be accessed through the xStation 5 platform. The version I found is in Spanish, so here I explain how to create it and how to trade a cryptocurrency CDF. All the images were edited by me and taken from XTB and my own xStation 5 demo account website. ^Source

1- Go to the XTB website to create a demo account.^Link Fill in all the required fields for email, country and agreement. Then press submit.

2- Fill in all the required fields for name, phone number and create a password. Then press submit.

3- Once you have completed the previous steps, you will receive this message thanking you for your registration. Then click to go to the demo account button.

Additionally this message will be sent to your e-mail address

_{Email welcome message}

4-Once logged in to the platform, click on the indicated button to access the list of cryptocurrencies. As you can see the platform offers several options such as adding charts of different assets.

You can also view the demo account number.

5-Select the cryptocurrency on which the contract will be opened. I select Ripple. Once this is done, the window with the contract data will be displayed.

Click on the icon indicated by the orange arrow to expand.

6-Once the window expands, enter the desired amount in volume. I enter 10000. Then click on the Buy button.

You can also see the value of the contract in the blue box.

_{Expanded contract window}

7-Finally you will receive a notification of the operation and the order will appear where indicated in the yellow box.

Conclusion

Cryptocurrency CFD is a powerful tool. If It is used by expert hands can become a means to earn large amounts of money in a short time and with a low level of investment.

However, it is also a dangerous tool, which in inexperienced hands can cause a lot of damage. The importance of a good financial education and knowledge of all the factors involved within the contracts should not be underestimated, as these are what will ensure a successful operation that pays dividends.

Nor can we forget the importance of detecting beforehand what type of investor we are, as this will tell us whether this strategy suits us or not.

I must confess. After studying this topic, I must conclude that due to my personality and the type of investor I consider myself, this strategy is not for me.

But I guess this is what trading is all about, learning all the strategies and tools and then selecting the one that best suits your style.