What is a CFD?

What is a CFD?

CFD Trading

Contracts for the difference – a CFD – is technically a unit that is traded on the platform. Essentially, this market is all about speculation. If you think that the price of an asset will rise, you purchase 10,000 units or CFDs to show that position in the market. Now, if the price actually does go up, you would make a proportional profit.

Conversely, if the market moves against you, you would be in a loss for your purchase of the 10,000 CFDs have been devalued. When you trade CFDs, you’re not trading the underlying asset, there’s no real world market access. You only buy CFDs, a speculative representation of the asset. The best part about trading CFDs is that you can go short as well as long. This allows people to invest in the long run as well as invest as day traders. That’s why CFD trading is a favourite amongst traders.

Imagine you think that the price of Ethereum will decrease in the future. You can sell 10,000 unit CFDs and buy them later on in the day. If the price did decrease, you would have sold them at a higher price than what you bought them at. That’s called going short and can make great profits. This process can be reversed as well if the price increases rather than decreasing. In this case, your loss could exceed your deposit.



What are the advantages of CFD trading?

Leverage trading is essentially like buying assets on a loan from the platform. You need to put in around 50% of the trade, the rest of it is paid by the broker. In the case of CFD or margin trading, this ‘broker’ would be the platform itself. The Bitcoin leverage depends on the Margin that is available on the platform.  

It will allow you to trade Bitcoin on margin that you normally wouldn’t be able to. So the profit would be all yours, minus the capital that was borrowed. Therefore, it’s pretty useful to trade on margin since you can make higher trades. Higher margins give you better leverage. Think of it like this, the bigger the loan that the broker is ready to give you, the bigger your trade size can be.

That means you could invest $5000 in a $50,000 commodity. If the price of the commodity rises by 50%, your profit on an investment of $5000 would be $25000. If you didn’t use Bitcoin Leverage Trading, your profit would be around $2500.

One of the best features of CFD trading is that the profitability of CFDs never change even if the markets rise or fall. Using CFD trading, you can make profits in falling markets. Imagine you know that the price of Bitcoin must fall due to a hard fork or another lead. Now, you can short this market and “sell” some CFDs in the market which you buy later on. This is quite profitable even in a hard falling market. This is relevant since many cryptocurrencies can lose value throughout the day and thus it’s best for cryptocurrency trading.

What is the best platform for CFD trading?

Plus500 is the world’s most popular CFD trading platform. That’s because it provides CFD trading on many different financial instruments such as gold, Bitcoin and wheat. It’s quite versatile because most CFD trading websites don’t provide many different instruments. Thus, on a CFD platform like Plus500, you can diversify your portfolio.

The greatest feature by far on Plus500 is that it displays most of the world’s financial instruments market prices on the website in real time, this allows for better monitoring of the trades that you make. The graphical representation on the website as well as an interesting feature because it is very easy to use and helps in developing your future speculations.

On Plus500, you can make a demo account and start mock trading within less than two minutes. This is pretty helpful since it can help you make a decision on whether you want to actually invest funds into your Plus500 account. It can also help you train to analyse the market and see how the platform operates. On the demo account, you receive a free deposit of $100,000 which you can then use to trade on crypto currencies and asset CFDs.

Check out our guide for the best Ether broker if you’re more interested in Ethereum!

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About Article Author

Michael Serrano
Michael Serrano

Michael is an engineer and a bitcoin evangelist. He has been involved in cryptocurrencies since 2013. His biggest wish? 1 billion users of bitcoin, ether and litecoin by 2020. In the last 10 years he has worked for various early-stage start-up as a back-end developer.

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