CFD: Bitcoin – The 5 Steps To Start Trading

7 December 2022, 15:27 GMT+0000
Updated by Petar Jovanovic
7 December 2022, 15:27 GMT+0000

Cryptocurrency trading has seen an incredible spike in popularity in recent years. In a survey conducted in 2022, millennials (ages 26-41) were found to be more likely to invest in digital currency than the older generation (ages 42-76) [1].

Millennials have a lot more years to go before they’re going to retire, and this is part of the reason why they are able to take on more risk with their investment strategies, given that they have a far longer investment horizon compared to someone that is fast approaching their retirement years [2].

Trading cryptocurrency Contract for Difference (CFD) is also a method that one can use to trade cryptocurrencies. Cryptocurrency CFD trading can also be a quicker way to get exposure to cryptocurrencies, in comparison to the actual purchase of Bitcoin, as it does not require the opening of a digital wallet or an account with cryptocurrency exchanges. 

Here are 5 steps for you to trade Bitcoin CFDs in the cryptocurrency market with Vantage.

What is Cryptocurrency, CFD and Bitcoin CFD?

Cryptocurrencies are a form of digital currencies that are secured by cryptography, and this makes it hard to counterfeit [3]. Many cryptocurrencies are built on decentralised networks that is based on blockchain technology – an advanced database mechanism that allows for a shared ledger to facilitate the process of recording, tracking and sharing of asset information within the network. This also means they do not depend on middlemen such as banks or other financial institutions to function. 

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One of the advantages of trading cryptocurrencies is that they could have lower correlation to with traditional asset classes such as bonds or stocks.

There are several methods that you can use to own these cryptocurrencies, such as buying them on the cryptocurrency market, mining them and saving them into your cryptocurrency wallet or digital wallet on the cryptocurrency exchanges.

CFDs trading are derivative instruments that enable traders to speculate on the movement in price of a wide range of financial markets such as fiat currency forex pairs, stocks, commodities, indices, or cryptocurrencies, without taking direct ownership of the underlying asset. When you are trading CFDs, you are essentially trading on the price movement of the underlying products or asset classes.

Bitcoin CFDs are investment vehicles that allow you to speculate on the rise or fall in price of Bitcoin without actually owning the underlying asset which is Bitcoin itself.

How does Bitcoin CFD trading work?  

Bitcoin CFD trading is the buying and selling of the digital currency, Bitcoin, with the potential of returns from the changing value of the price movement. The Bitcoin CFD is traded through a broker which is as simple and secure as trading stocks and forex. 

With Vantage, you can buy and sell cryptocurrency CFDs by predicting the price movements of Bitcoin. Vantage is also offering no overnight fees when you trade with their swap-free account on all cryptocurrency CFDs. 

Here are some examples of Bitcoin CFD trading:

When the closing price of the Bitcoin CFD is higher than its opening price, the seller will pay the buyer the difference and this is how the buyer will make a profit. When the closing price of Bitcoin CFD is lower than its opening price, the buyer will then pay the difference into the seller’s account with a loss.

Another example is when you choose to trade by going long or short. When you place a ‘long position’ trade, your open position will only increase in value when Bitcoin’s price increases. If the Bitcoin’s price falls, then your position will lose in value.

Difference Between Trading Bitcoin CFDs and Trading Cryptocurrencies Traditionally

One main difference when trading cryptocurrency CFDs and trading cryptocurrency directly is the ownership of the underlying cryptocurrency. 

When you trade cryptocurrencies traditionally, you are required to have a cryptocurrency wallet with the trading platform or an exchange. This wallet is required for you to store the cryptocurrency purchased. When you trade Bitcoin CFDs, you are just agreeing to exchange the difference in the price of the Bitcoin from the point at which the contract is opened to when it is closed.

Another difference between trading Bitcoin CFD and cryptocurrency is that you are able to speculate on the price movement in either direction, with the profit or loss you make dependent on the extent to which your forecast is correct. In traditional cryptocurrency trading, to earn a profit, you will strive to buy the cryptocurrency coins at a lower price and sell it when the price of the cryptocurrency coins goes higher to earn based on the gain in price.

Advantage of trading Bitcoin CFDs 

Potential for upside in both the rising and falling markets

CFDs typically create trading opportunities on price differences. As you are able to make short or long trades when you trade CFDs, you trade on the opportunities that arise when the market moves either way. Yes, that means the potential to reap returns even when the markets are falling. 

No expiration dates

CFDs allow you to trade the price movement of the Bitcoin CFD without an expiration date. You can get into a long-term CFD position, unlike futures contracts which have a pre-set price with a future expiration date.

CFDs as hedging tools

You can hedge other holdings in your trading portfolio with Bitcoin CFDs. Hedging refers to opening a position in a financial instrument with the aim to offset one’s exposure to price fluctuations of a different asset that go in the opposite position. For example, you could short or long with the Bitcoin CFD regardless of the market’s direction which allows you to hedge your portfolio at any time. This helps you to reduce your risk exposure.

Underlying asset ownership not required

By trading Bitcoin CFDs, it allows you to start trading cryptos without having to own the cryptocurrency itself. You are only required to put in capital into the CFD trading account to begin trading.

Trading using leverage

Bitcoin CFDs allows you to make trades far larger than your actual deposit, through leverage. For example, when you trade with Vantage, you can buy and sell cryptocurrency CFDs with leverage up to two times more. Please note that leverage can amplify both profits as well as losses.

Disadvantages of Trading Bitcoin CFDs

You don’t own the cryptos

When you trade cryptocurrency CFDs, you do not actually own the cryptocurrencies. You are simply speculating on the price on the trading platforms. If you want to own the cryptocurrency, you will need to withdraw your money from the trading platform and place it into a cryptocurrency exchange that allows you to trade Bitcoin as a product. 

This would then require you to have a Bitcoin wallet to store the Bitcoin on the Bitcoin exchange platform.

Cost considerations

Cryptocurrency CFDs come with an extra cost in the form of a spread which represents the difference between the buying and selling price. The less liquid and riskier an asset is, the wider the spread you have to pay.

Overtrading

Ease of access to CFD trading and low requirements can lead to overtrading. As most brokers provide a low margin trading requirement, you may fall into the trap of overtrading. This will expose your portfolio to the markets more than you can handle and your remaining capital may fail to cover any incurred losses. So, it’s important to have proper risk management when you trade CFDs.

Leverage can be a double-edged sword

Leveraging or margin trading not only amplifies your returns, but it can also lead to significantly higher losses. The cryptocurrency markets are highly volatile, resulting in several intraday changes, which often make it difficult to make the right predictions about future price movements.

5 Steps to Start Trading Bitcoin CFDs 

To begin your Bitcoin CFD trading journey, you can follow these steps:

  1. Open Your Trading Account With Vantage

First, open a trading account with Vantage here. All it takes is 5 minutes to open a live trading account with Vantage. To complete your registration process, a proof of identification documents and proof of address to verify your account is required. Once your account is verified, you can access the full feature of your account and start trading Bitcoin CFDs.

  1. Fund Your Trading Account

Once your trading account on Vantage is completed, you can begin depositing funds to your account to start trading. Vantage offers a variety of payment methods for you to fund your account. Do take note that funding options can vary from country to country.

  1. Create a Trading Plan

A solid trading plan can help you determine your trading timeframe, risk appetite and ideal capital to open any leveraged positions. Having a proper trading plan will help you make calculated decisions and better decisions on your desired returns, acceptable loss and the risk management strategies to use that can protect your capital [4].

  1. Open and Monitor Your First Position

Once you’ve chosen your markets, decide whether you want to go long or short. You can open a sell position if you anticipate the price of Bitcoin will decline. CFDs give you the opportunity to access both long or short options. You may consider using tools like setting a stop-loss in order to help manage risk and reduce exposure according to the market conditions.

  1. Close Your First Position

Once your position moves in your favour, you can click the “close” button to exit the trade. You can also use this button to exit any losing trades and take an acceptable loss. To close a long position, you will ‘sell’ your CFD, and closing a short position will ‘buy’ a CFD. 

Tips for Traders With No Trading Experience

Vantage also provides a demo account for new traders who are embarking on their trading journey. Take advantage of the Vantage demo account to pick up all the necessary skills a trader would need, and practise trading risk-free with virtual funds of up to $100,000. Sign up here for your demo account.

You can take your time and practise trading various products that are offered by Vantage such as CFDs on crypto, forex and stocks.

For experienced traders who are looking to adapt to an ever-changing market, you can also take advantage of the demo account to test out new strategies in a risk-free trading environment. To stay ahead of the game, you have to continuously test new trading strategies and adapt to changing market conditions. 

Ready to get started? Open a live account here to start trading the market when opportunities arise. 

Reference:

  1. “Younger Generations More Bullish on Cryptocurrencies – Investopedia” https://www.investopedia.com/younger-generations-bullish-on-cryptocurrencies-5223563 Accessed 07 Nov 2022
  2. “Most Millennial and Gen Z Investors Say Crypto Is Part of Their Retirement Strategy – Money.com” https://money.com/gen-z-millennials-invest-crypto-retirement/ Accessed 07 Nov 2022
  3. “Cryptocurrency Explained With Pros and Cons for Investment – Investopedia” https://www.investopedia.com/terms/c/cryptocurrency.asp Accessed 07 Nov 2022
  4. “CFD trading strategies to trade stocks, Forex and more – Skilling” https://skilling.com/row/en/blog/trading-articles/cfd-trading-strategies-to-trade-stocks-forex-and-more/ Accessed 07 Nov 2022

Disclaimer

Any third-party hyperlinks and banners don’t constitute an endorsement, guarantee, endorsement, warranty, or recommendation by BeInCrypto. Cryptocurrencies are highly volatile. Do Your Own Research before using any third-party services or considering any financial action.