A cryptocurrency is a fairly new asset class that was created when Satoshi Nakamoto mined the very first block of Bitcoin. Cryptocurrencies are a digital type of currency that is guaranteed by the blockchain ledger. Just like other currencies, the cryptocurrencies can be used to buy goods and services. They can also be used as an investment as well as trading CFDs on them. Unlike the traditional fiat currencies, the cryptocurrencies are not issued by any government or central bank. They are decentralized and cannot be controlled by any individual or entity. This is part of the appeal of cryptocurrencies and one of the reasons they have become so popular.
There are literally thousands of cryptocurrencies, but only a handful are very popular for traders. That handful includes Bitcoin, which was the very first cryptocurrency. It remains the largest by market capitalization and out of the entire cryptocurrency market, Bitcoin holds over 60% of the total market cap. Other popular cryptocurrencies include:
- Ethereum – A smart contract network that powers decentralized applications and the decentralized finance ecosystem.
- Ripple – A project attempting to replace the SWIFT banking transfer system.
- Litecoin – Often called ‘digital silver’ to Bitcoin’s title of ‘digital gold’.
- Polkadot – A decentralized finance token that has only recently gained in popularity.
- Tether – A stable coin that seeks to peg its value to $1.
Cryptocurrencies have some technological hurdles to clear, but they also have many advantages. One of the biggest advantages is the low fees for large transactions. There have been transfers of hundreds of millions of dollars made for less than $1. The transfers are also extremely fast. Where a wire transfer through a bank could take several days to arrive at the recipient, a Bitcoin transfer takes no longer than 10 minutes in most cases, no matter how large or small the transaction is.
When it comes to trading the chief advantage of cryptocurrencies is the diversity of assets available to trade. There are literally thousands of different cryptocurrencies, and each one has its own use case and price history. Traders are able to specialize in cryptocurrency markets if they like.
Other benefits of cryptocurrencies include privacy, decentralization, security, and strong ownership rights.
Suppose you’re interested in Bitcoin and believe it will increase in value versus the U.S. dollar in the coming days. You decide to trade BTC/USD using CFDs. Currently Bitcoin is being quoted at $36,410 / $36,510. You decide to purchase 2 units opening at $36,510. This is equivalent to buying 2 BTC, so you will gain or lose $2 for every $1 that Bitcoin moves.
- â€‹Profitable Trade: â€‹â€‹The value of Bitcoin does rises against the U.S. dollar, and the new price quote is $37,390 / $37,490. You close your trade at $37,390 and profit $1,760.
- Losing Trade: â€‹The value of Bitcoin falls against the U.S. dollar, and the new price quote is $35,630 / $35,730. You close the trade at $35,630 and take a loss of $1,760 on the trade.
Cryptocurrencies CFDs Trading Risks
As you can see from the example above there are some risks involved in trading cryptocurrency CFDs. The largest risk, especially for those who are inexperienced with cryptocurrencies, is the price volatility associated with the asset class. Because cryptocurrencies and the CFDs linked to them, are so volatile it is possible to lose a large amount of money in a very short period of time.
There is also the leverage involved in CFD trading to consider. With an asset that’s already as volatile as cryptocurrencies, adding leverage can be like pouring gasoline on a fire. Great if it’s in your favour, but disastrous if it goes against you.
Finally, because cryptocurrency markets are still relatively small and unregulated there is little price transparency. Manipulation is known to occur, the lack of transparency and liquidity, can cause significant variations when pricing cryptocurrencies.