STEEMIT CRYPTO ACADEMY SEASON 2 WEEK2| HOMEWORK TASK CFDs for @kouba01
Hi steemians,
Another week of exciting course topic by @kouba01. my regards to all the SteemitCrytoAcademy Professors and participants. In this post I would be talking about CRYPTOCURRENCY CONTRACT FOR DIFFERENCE (CFD).
WHAT IS A CRYPTOCURRENCY CFD?
A Cryptocurrency CFD or a cryptocurrency contract for difference is a complex financial instrument, which allow an investor to speculate on the price of a crypto asset. This type of assets are digital in nature as they are not physical currencies like the currencies produced from our decentralized systems like banks.
The CFD contains an agreement based on the crypto asset, where thee investor does not outrightly own the cryptocurrency but expects it to appreciate or depreciate in value in order to trade with it. Hence when an investor decides to trade an CFD, it is a win or loose situation since for every point the prices appreciates in his/her speculated direction, he is paid in multiples on the amount of cryptocurrency bought.
Also, when the price of the cryptocurrency depreciates, it is vice versa. Hence in CFD’s trading, an investor makes profits in a bull market and looses in a bear market. In simpler terms, a cryptocurrency CFD is a method used by crypto investors to predict or speculate the price of a cryptocurrency within a certain period.
HOW DO I KNW IF CRYPTO CFDs ARE SUITABLE FOR MY TRADING STRATEGY?
CFD trading involves a lot of risk to your capital compared to the other kind of investments as prices may or may not move in your favor. Hence it is possible to loose all your startup fund in a very short while, therefore CFD trading may not be suitable for all investors.
Also, only investors with a short them plan strive well in the market. When a small profit margin is realized, he sells and make his profits as cryptocurrency prices are highly volatile. But a long term investor would want to hold on until the profit margin doubles or even triples and ca n therefore acquire huge losses when prices surge.
Moreover, an investor can know if a CFD Suits his trading strategy if he is interested in investing with a small capital intends to make huge profits from smaller amounts of money.
In addition, risk tolerance of an investor is very crucial in CFD’s. investors who have little or zero risk tolerance are advised to keep off cryptocurrency CFD’s.
Lastly, an investor can also determine if cryptocurrency CFD suits his trading if he seeks a safe trading space or environment that provides protection to investors. Entities like CFD brokers provide this safe and sound trading platform and also protects the investor.
ARE CFDs RISKY FINANCIAL PRODUCTS?
CFDs can be quite risky due to its low industry regulation and also its lack of liquidity. CFDs are highly leveraged over the counter derivatives in which could lead to higher profit margins on smaller capitals and is also possible to loose more than your initial deposit.
Also the price volatility of the cryptocurrencies make crypto CFDs very risky as the sudden changes in the market trend or price of the asset may result in inevitable situations such as a market crash.
But generally, how risky CFDs are would depend on the investor. For a sophisticated investor who knows how to manage risk, and also knows how to make profits when there is an increase or decrease in the price of the cryptocurrency would not bother about the risks mentioned above.
But for a beginner or average investor like me who knows little about how to manage risk, has zero risk tolerance and cannot make profit when asset prices are low, CFD trading will be a very risky investment.
ADVANTAGES OF CRYPTOCURRENCY CFDS
• CFDs have very low transactions costs as compared to other trading methods.
• Also in CFD trading, an investor can trade in both a bull and bear market, i.e. a rising and falling market. An investor can benefit in the market from either selling (shorting) or buying opportunities.
• Also there are better regulations in cryptocurrency CFDs. Most companies involved in cryptocurrency CFD tradings are highly reputable companies with better expertise whom secure and protect the funds of the investor from hackers or fraud attacks.
• Lastly, there exist leverage trading in CFDs, where the investor has access to the asset at a lower cost than outrightly buying the asset. Hence with little capital one can start a cryptocurrency CFD and make good profits.
DISADVANTAGES OF CFDs
• Cryptocurrency CFDs are highly volatile, hence is not a suitable investment for an average investor as the entire startup capital can be lost in just a matter of seconds.
• Also there is lack of ownership in CFDs. There is no underlying ownership of he asset, the investor is only binded to the asset through a contract. This makes CFDs a less healthy investment.
• The low capital requirements and easy to access nature of CFDs can result in overtrading.
DO ALL BROKERS OFFER CFDs?
Currently not all brokers offer cryptocurrency difference contract services (CFDS). This is due to the low liquidity nature of the cryptocurrencies as they are not generally accepted as payment methods. In the near future, when cryptocurrencies become widely known and widely accepted in trading, most brokers would start to offer cryptocurrency difference contract services.
EXPLAIN HOW YOU CAN TRADE WITH A CRYPTOCURRENCY CFDs ON ONE OF THE BROKERS
(USING A DEMO ACCOUNT).
• Firstly, I visited www.etoro.com a CFD broker website.
• I successfully created an account and then switched from real to virtual portfolio.
• I proceeded to trade markets, where I selected crypto.
• A collection of cryptocurrency showed up and I clicked on bitcoin.
• I then proceeded to trade.
• After which I successfully opened a trade worth $5000.
Here are some screenshots for your perusal
In conclusion, Cryptocurrency CFDs are very risky investments. Therefore, much skill is needed to strive in these investments when one feels like investing into one. Skills like risk management and price forecasting are very key skills needed to make profits and curb losses in CFD investments.
Special thanks to @kouba01 and all the SteemitCryptoacademy Professors for their useful courses.
Thank you for your time.
Your comments and suggestions are highly appreciated.