Crypto Academy Week 10 | Homework Post for @kouba01 | Cryptocurrency Contracts For Difference (CFDs) Trading
I am highly thankful to professor @kouba01 for making us understand a very important concept of Crypto trading. The way of explaining things by professor is unique. Here I'll try to put forth my task to the best of my understanding :
What is a cryptocurrency CFD?
Cryptocurrency contract for difference is an agreement between two parties where one party known as broker offers cryptocurrency to the the other party known as Client or trader for trading purpose. CFD means contract for difference, so the two important words that are involved in CFD are "contract" and "difference".if we will try to understand the meaning of these two words, we can understand the whole concept.
Contract as the name implies is an agreement between two parties based on certain terms and conditions that are agreed by both the parties mutually and with proper consent.
As for the word difference is concerned, it refers to the monetary settlement that these two parties have to undergo at the end of closing the contract. If trade goes in favour of the client , then amount equivalent to the difference between the opening and closing price has to be paid by the broker to the trader . if the trade goes against the trading experience of client, than an amount equal to difference between two prices has to be paid by broker to the client. So the monetary settlement is in terms of difference between two prices.
Let's try to understand it with the help of an example. Let's presume a hypothetical broker offers a client cryptocurrency CFD with each contract set to $1. Let's say the cryptocurrency that he offers be Etherium at opening price of $2200. After mutually agreeing on terms and conditions, client set the order of a cryptocurrency for trade. Universal fact during trading is that , two possibilities are there:
First possibility is that, the price of ETH goes up and at the time of closure of the contract the price has reached $2,600, so the difference in opening and closing price of the CFD IS $400 , as the contract has been set to $1. So the trade was in the favour of client, a broker has to pay $400 to the client.
Second possibility is that, price of ETH goes down and client closed it at $1800 , again concept of difference comes into play, but in reverse direction. In this context, client has to pay $400 to the trader.
It is basically a wonderful concept becausee a client does not possess cryptocurrency of his own but is being paid by broker, so client has no headache of maintaining cryptocurrency on his own.
How do I know if cryptocurrency CFDs are suitable for my trading strategy?
Two things are important to understand for a trader to know, if CFD are suitable or not and those two things are CFD and trading strategy. First a trader should have complete knowledge of CFD like working, risks and benefits. Than he should be aware of his trading strategy. Why I am saying so. It is because when a trader has sufficient knowledge of CFD and is aware of his trading strategy , only then he can figure out whether to trade or not. if traders are lacking in either of these two, then they can't figure it out and may end up in loss.
Let me talk about myself, I am having conservative risk tolerance, which means I can afford least amount of the risk, so one side of my trading balance is weak and the other side is not that strong so as to compensate for weakness. So I would say, I am not comfortable in trading cryptocurrencies under CFD.
Had I been moderate to aggressive trader and with ample knowledge and expertise of CFD trading , it would have been a better opportunity for me to trade crypto CFD.
Are CFDs risky financial products?
Do all brokers offer cryptocurrency CFDs?
I would say , yes CFDs are financial risky products because in CFD a trade has to be executed on borrowed cryptocurrency. If trade does not go in favour then hefty bucks are lost.
Keeping the price of certain top cryptocurrencies like BTC and ETH in view. For a trader like me, it means a lot. I can say that i cannot afford either of them but if somehow I enter into trading contract on any one of these two Crypto coins and trade didn't go in my favour then it's going to land me in trouble.
Leveraging of cryptocurrency offered by certain brokers is in itself risky contract because leveraged assets are much more than the funds that you are supposed to have in your account. If trade goes in favour, it's going to yield heavy profit but if trade doesn't go in favour it is going to land us in great trouble.
Forced liquidation in case of any untoward event is another risk, that has to be anticipated before going for CFD trading on leverage.
Do all brokers offer cryptocurrency CFDs?
No all brokers do not offer cryptocurrency CFDs. However, there are some leading platform that offer Crypto CFDs. Some good platforms like Binance do not offer CFD while on the other hand equaity reputed brokers like eToro, ICMarkets do offer crypto CFDa.
Explain how you can trade with cryptocurrency CFDs on one of the brokers (Using a demo account).
Let's take eToro as a broker.
Go to https://www.etoro.com/ and click on "join now". On next page fill your personal details. Than share trading knowledge and experiamce. Than click on top left corner and complete your profile. Once dome, account is ready to record roders.
- Switch to virtual account from top left corner as shown below.
Click on top left corner, and than from memu click on " trade markets".
Selecte the asset to be traded.
Click on trade .
Click on buy or sell amd fill details and click on open trade.
That's all from my side today.
Hi @magmuz
Thanks for your participation in the Steemit Crypto Academy
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Good work. Well done with your research Cryptocurrency CFDs
Homework task
7
Thank you for reviewing rmy task.
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