Shorting Bitcoin with CFDs
CFDs (Contracts for Difference) are contracts between an investor and a broker. Allowing investors to speculate on the price movements of various types of assets, such as commodities, stocks, currencies, and indices. Both ‘short’ and ‘long’. Traders make money by correctly predicting price movements, up or down. Simply put, the broker will pay the investor the difference between the current value of the asset and its value at the time the contract was initiated.
Interest in CFD trading is growing, with more and more people wanting to learn how to approach it. It’s a popular way of trading in cryptocurrency. What are the advantages and disadvantages of this trading method?
Pros and Cons
Although CFDs are very popular a among investors, like all instruments, they come with both advantages and disadvantages.
Long and Short
With CFDs, you can speculate on the price movements of an asset, both upwards and downwards. This means you can make money in any market, including a bear market. This allows you to short cryptocurrencies, like Bitcoin.
No interaction with actual Bitcoin is required to profit from changes in its value without worrying about storage and security.
CFDs have relatively low transaction costs, making them attractive to investors with limited budgets.
Low capital requirements
Due to the relatively low initial capital required for CFD trading, it is accessible to a relatively wide range of potential traders.
Some brokers offer leveraged or margin trading. This opens the possibility of trading with borrowed funds and handling a larger positions with a lower investment. Trading with larger amounts can result in higher profits.
Unlike futures, for example, CFDs are flexible. They have no fixed expiration date, and you can trade 24/7, opening and closing trades quickly. To limit potential losses and manage transactions, traders can use stop-loss orders, among other methods to mitigate risk.
Ownership of assets
CFD contracts are centered around price changes. The trader never actually owns the asset being traded. Nor does the CFD platform.
Leverage or margin trading is a two-edged sword. It amplifies profits when the trade goes in the desired direction, but works equally so when the market is moving against you.
Some CFD platforms may be of questionable nature. It requires some due dillegence to confirm the regulatory status of a CFD provider.
Regulated CFD providers
If you decide that CFDs are your prefered instrument to short Bitcoin, or other cryptocurrencies, and you want to gain some hands-on experience, it is advisable to use a practice or trial account first. Above all, it is important to sign up with a regulated CFD provider like Plus500 (regulatory details), eTorro (regulatory details) or IGmarkets (regulatory details).