Crypto Academy Week 10- Homework Post for Professor @kouba01 - Topic: Cryptocurrency Contracts For Difference (CFDs) Trading.
It is no longer news that Cryptocurrency CFD now dominates over every CFDs in the global market. This wasn't so seven years ago. During those previous years, CFDs were only used for betting on assets such as oils, metals, market factors like indices, and speculating on the foreign exchange markets.
This sudden change in the global market can be traced back to the year 2017. In that year we saw the value of BTC rise spontaneously from $1000 dollars in the beginning of the year to more than $19000 by December of the same year.
The growth was so significant that no trader could ignore it. It created so much awareness which has remained with it over the years. It is not surprising that the awareness has brought cryptocurrency CFDs to the all time high it's today among CFDs.
Am really grateful to be a part of Steemit Crypto Academy, am also thankful for being a part of Professor @kouba01 lesson today. Thanks to the lesson I am now exposed to the concept of Cryptocurrency Contracts for Difference. Below is my response to the exercise given by the professor.
Question 1: WHAT IS A CRYPTOCURRENCY CFD?
To better appreciate the phrase "Cryptocurrency CFD", we need to define the terms "CFD" and Cryptocurrency.
CFD stands for Contract for Difference. Just as the "contract" in it's name implies, it is an agreement between two parties (a trader and a broker) that is based on asset which is usually in the form of an index, commodity, stock, cruptocurrency e.t.c. Although the contract is based on an asset, the asset doesn't necessarily need to be in the possession of any of the parties involved.
A cryptocurrency is a digital currency whose transactions are both secured and verified using cryptography and are recorded in a decentralized ledger known as blockchain.
Putting both definitions together,
Cryptocurrency CFD is simply an agreement between two parties that is based on a cryptocurrency.
When activities approved by the agreement are being carried out, a Cryptocurrency CFD Trading is said to be taking place.
Question 2: HOW DO I KNOW IF CRYPTOCURRENCY CFDs ARE SUITABLE FOR MY TRADING STRATEGY?
To answer this question, I will pick out some of the characteristics of cryptocurrency CFDs suggested by professor @kouba01 in the lesson and then compare them with how I react in real life situation.
Bear in mind that purchasing cryptocurrency is too expensive for you.
For people like me who joined the "crypto-bus" very late, we don't need to be told how expensive cryptocurrency is today. As of today, 1 BTC is worth $54,473. At that rate, I can't buy BTC, even as a asset I could sell back.
Profit from trading on margin while having a relatively low initial capital
Although I have not carried out a CFDs trading, I have tried the flexible savings offered by Binance (although both doesn't mean the same thing, and Binance is not a CFDs broker). Most of those time, the money I saved weren't worth so much. During the savings, I pay much attention to the value of the coin so as to make sure that when it begins to fall, it doesn't fall far below a certain level. Although the profit I make will be marginal due to the low risk factor and the little amount of money I invested, I am really happy with it.
Follow an investment target to make quick wins on small price changes.
While still on Binance, I do watch out for small for small price changes, and whenever I believe I will make a reasonable amount (most times they are small) profit I either sell or buy a coin using the coins I have in my wallet.
Favorable to short term trading strategy
I prefer short term trades more than long term trades. Although long term trades comes with much profit when they are successful, I find it hard to equate its profits to the high risk that accompanies it.
Enjoy taking risks and trading in stressful trading environments.
A life without risks is actually not fun. Each time I engage on a riskful task and come out unhurt, I do feel like a super man. So, while investing on crypto, I don't withdraw immediately the value of the coin starts going down, rather I do make a mental note of how low I won't mind my coins to fall. Once they get to that point I withdrawal. But that's not the case most times as they tend to rise again.
Considering all these characteristics, I believe that Cryptocurrency CFD fits into my trading strategy, and it's definitely a field I long to explore.
Question 3: ARE CFDs RISKY FINANCIAL PROJECT?
Yes, CFDs are Risky Financial Projects, but most times, traders fail to see the risks due to the several advantages of CFD trading. These risks are classified into counterparty risk, market risk, client money risk, and liquidity risk.
- Counterparty Risk:
The company that provides the asset in the CFD transaction is referred to as the counterparty. From the definition of CFD trading, you will observe that the contract issues by the CFD provider is the actual asset that is being traded. What this implies is that, since it is the counterparty that issues the asset provided by the CFD provider, there will be a big problem if the Provider can't be able to fufill it's financial obligations. If for instance the above scenario occurs, the contracted assets becomes valueless and the whole transaction turns into a big loss for the trader.
The CFD industry is not strictly regulated and most investments are done based on past reputations. Therefore, you need to properly investigate a broker before going into business with them. - Market Risk:
In CFDs a trader is allowed to predict whether an underlying asset such as cryptocurrencies and stock will rise or fall in the long run or in the short run. If a trader believes the value of the asset will rise, he chooses the long position, but if he believes it will fall, he chooses a short position.
Since no one knows tomorrow, and even the best of investors can be proven wrong sometimes the risk of losing is there. With the way CFDs are structured, you can even deposit about 20% of the total asset you wish to trade and rip profits as if what you deposited was 100%.
Although this sounds nice, it also means that when you begin to lose, your losses will be deducted as if you deposited 100%. This is very tricky as small changes in the market influenced by government policy, unexpected information e.t.c can have devastating effects on the trader.
Pixabay.com: Policy - Client Money Risk:
Due to the way CFD are structured, once a contract has been set up, the provider withdraw a certain amount known as the "initial margin" from the pooled account. The pooled account is where all the contract agreement deposit are saved. Apart from the initial margin, the provider has the right to request for further margins. This reduces the amount in the pool, thus affecting the returns on a long run.
Although this might seem as a harmful practice to you as a trader, this is as best as it can get, for already there are client money protection laws which ensures that the trader's payment be seperated from the provider's money, and if the law was not in existence, this would have been a very high risk. - Liquidity Risks and Gapping:
The condition of the market can affect a contract greatly. If for any reason there are not enough trades for the asset you are holding in the market, you contract becomes illiquid. When this happens, the CFD provider either closes the contract at an inferior price or he asks for additional margin payment. Both options are not good news for the trader.
Question 4: DO ALL BROKERS OFFER CRYPTOCURRENCY CFDS?
Not all brokers offer cryptocurrency CFDs. For instance, brokers like eToro are cryptocurrency CFDs brokers, while brokers like Binance and TD Ameritrade do not offer cryptocurrency CFDs.
It worth noting that most brokers are now incorporating cryptocurrency CFDs in the services they offer. For instance, MT4 allows CFD trades on Bitcoin.
Probably, in the nearest future, cryptocurrency CFDs will be something offered by every brokers in the planet.
Question Five: Explain how you can trade with Cryptocurrency CFDS on one of the brokers(using a demo account)
Due to the user friendly set up of eToro, I will be using it to explain in detail how I trade with cryptocurrency CFDS.
I use the andriod version 317.0.0 of the eToro app. Although the interface may vary if you use a different version, the processes are the same. For more clarity, I will be using red arrows as major pointers while the blue circles represent things to check out for so as to know you are in the right page.
Step 1:
The first thing I do is to open the eToro app on my phone. An interface comes up requiring that I put in my email address and login password, and when i have done that, i will be directed to the home page..
In case you don't have an account with eToro, you can set one up by clicking on the "sign up".
Step 2:
To switch my account to a demo account, I click on the menu on the top left side of the page. This menu is represented by three horizontal lines.
After clicking on the menu, an interface containing my username comes up. Just at the right side below the user name i will find a green "Real" button with a drop down arrow.
Step 3:
After clicking on the "real" button, a pop-up menu pops up asking me to select between real and virtual, then I select virtual.
When I click on virtual, I will be taken to a page. Just below the page i will find "Go to virtual Portfolio", I click on it.
After clicking on "Go to virtual Portfolio", you will notice that the homepage changes from a black background to a blue one. You will also notice you that you have been given $100,000 to practice on the demo platform.
Step 4: Trading proper
On the home page I will find three columns titled market, sell and buy. There are several coins listed under the market column. Since I wish to buy 30 units of ADA, I will scroll down to where ADA is and click on it.
After clicking on it, the trade menu comes up showing that I am buying ADA at a certain value. I will specific how many pieces of ADA (in this case 30) I wish to buy in the space indicated by the red arrow on the screenshot below.
Step 5:
After specifing how many pieces am buying, I will then click on "open trade".
In case you plan on long trades, you will be charged an overnight fee. The fee is display just below the "open trade" button.
Step 6 To know the progress of my trade, I click on the symbol indicated in the picture below.
After clicking on the symbol, i will be redirected to a page showing all trade that i am currently running. To know more about my investment, I can click on any of the trades.
Step 7
To close a trade, I click on that trade. When I do, a page pops up asking me if I want to close the trade, of which I will accept by clicking on close.
In conclusion, Cryptocurrency CFDs provides the trader an opportunity to trade on cryptocurrencies he may not have using fiats. This cuts down the need to convert fiats to coins before trading with them.
Just like every financial opportunity in cryptocurrency, cryptocurrency CFDs offers everyone who wishes to partake in it an opportunity to become wealthy. Being a high risk project, it is advisable for a trader to be smart about his decisions while trading and never let greed take control, for if it does, the repercussion may be devasting.
Thank you so much Professor @kouba01, I learnt a lot from your lesson.
References
Hi @whileponderin
Thanks for your participation in the Steemit Crypto Academy
Feedback
This is very good work. Well done with your research study on Cryptocurrency CFDs.
Homework task
9
Thank you so much @yohan2on
Hello Professor @Kouba01 and Professor @yohan2on, please professors, am yet to be curated by @steemcurator02 after being reviewed by you. In the review, you rated me 9. Pls professors, can you help me? I have only a day left.
Thank you so much @Kouba01