Crypto Academy Week 10 | Homework Post for [ @kouba01 ] Cryptocurrency Contracts For Difference (CFDs) Trading.
Today i am submitting my homework task for @kouba01 , which is about Contracts for Difference (CFDs). I thank professor for such a wonderful topic and an excellent and simplified way of explaining it. Let me try to do homework as asked.
What is a cryptocurrency CFD?
Cryptocurrency contract for difference means an agreement between a broker and a client against underlying cryptocurrency. To simplify let me put it like this , a broker offers cryptocurrency to a client for bidding . A client does not own cryptocurrency here, but he can trade with cryptocurrency offered by broker. As a trader, you may expect price of cryptocurrency to either rise or fall in near future. If you expect price to rise,
you will purchase the asset or open long position. If you anticipate price to drop, you will sell the asset or open short position.
Before the trade is initiated, you need to agree terms and conditions of broker like fee charged, opening price etc. Once you are fully satisfied, you open a position. Than you start the bid ( trade) and continue as long as you want . You can close position on your own or position will be automatically closed, when certain preset conditions ( stop loss, profit level) are met. After closure, the difference between the opening and closing price is calculated. If the difference is positive, broker pays the difference equivalent of sum to the client but if it is negative, client will have to pay to the broker.
To clarify it further, let's take an example,
Suppose your broker offered BTC in CFD to you at a price of $49 500 and each contract is set at 1$. After sometime, you noticed that your experience of trading worked for you, and BTC price goes up to $50 000. So the difference between opening and closing price is 500$. Ae each point equals 1$. so you will be paid 500$ by broker.
Another scenario may be reverse of it, your luck didn't favour you nor did your experience, and price of BTC start falling . You can either continue to hold, with the hope of price hike in near future but for that you will have to pay fee to the broker for holding long. Another situation is that, to prevent more loss you sold BTC at $49 300. So the difference between the opening and closing price is $200. In this case, you will have to pay 200 dollars to the broker.
How do I know if cryptocurrency CFDs are suitable for my trading strategy?
Everyone of us as a human being is aware of one's strengths and weaknesses. Extrapolating the same , to the trading potentials , we are all aware of areas where we are strong and areas where there is still some scope of improvement. Keeping those potentials under consideration, one has to decide weather CFDs synchronize with our trading strategy or not. Let's take examples
As a trader, I should be aware of my risk potential, weather my risk potential is conservative , moderate or aggressive. On that basis , I'll decide which CFD contract I should enter and whether I should enter or not.
Trading knowledge,
skills and expertise are other factors that will help in determining whether to go for CFDs trading or not. If you are an expert trader, then you should give try to CFDs too because at times, you can secure huge profit in short intervals of time. Leverage and margin trading are other perspectives linked to CFDs where one should do proper risk benefit analysis to determine whether to enter or not.
Are CFDs risky financial products?
There is always an element of financial risk involved in CFDs. Let's analyse some perspectives linked to CFD trading.
Leverage offered by brokers may at times render you bankrupt. In leverage a trader, trades on disproportionately large amount after depositing some minimum funds before hand. Suppose, a broker offers 50x leverage and you have 100$ in your possession. Without leverage, you can only trade for $100 that you have. With the concept of leverage , you can trade for ( 100 x 50 ) $ 5000 , which is disproportionately larger than your possesion or affordability. In this context , if your CFD trade does not go well, it can render you bankrupt.
Another aspect to be noted is ''price volatility''. Sometimes wild swings are seen in cryptocurrency prices , so much so that, even intraday variations become significant. In CFD trading, you can avail an option of holding long , with the hope of price returning back or showing some hike. For that, the roll over fee that you will have to pay to broker must be considered. So there is an element of dual risk, one is due to price decrease and another is due to roll over fee charged.
Do all brokers offer cryptocurrency CFDs?
Basically CFDs are not limited to cryptocurrencies only. To begin with, it started from stocks and than expanded to other sectors too. However, some brokers are yet to offer CFDs. For example, Binance and TD Ameritrade do not offer. However, there are ample number of brokers that offer CFDs. So, as of now, it is not an issue to get a broker for CFD trading. Examples of some well known brokers are eToro, icmarkets, Avatrade etc.
Explain how you can trade with cryptocurrency CFDs on one of the brokers (Using a demo account).
I'll demonstrate step by step with the help of eToro .
Go to https://www.etoro.com/ and click on the “Join Now” .
Next enter user name, email and password and click on create account.
Welcome notice will appear and you will land into main page of eToro.
Click on top left corner, a drop down menu will appear amd the first option there will be "complete profile".
Click here and fill your personal details.
Next it will test your knowledge amd trading experience by asking you different questions. Answer the questions and proceed. Once you complete all the formalities , you will again land in the main page of the website. Now you can place your order.
Let me tell you, how to place your demo account order.
- Click on top left corner as before , a drop down menu will appear, select virtual account as shown below.
- Cl8ck on switch to virtual portfolio.
- You will be taken to main page, where you have to select the asset to invest in .
Click on trade
Next click on Buy and select amount and than click on open trade.
Monitor your order for progress.
Hello @drqamu,
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 9/10 rating, according to the following scale:
My review :
An article with excellent content, you clearly answered all questions in a unique style of writing, I would have liked if you had tried another CFD broker in order to enrich our experiences with several platforms.
Thanks again for your effort, and we look forward to reading your next work.
Sincerely,@kouba01
Thank you very much .
Actually. I thought that is not mandatory. Anyways thank you.