What Crypto CFDs Are and How to Trade Them

Learn how to trade a crypto Contract for Difference (CFD) in the Crypto.com App and the advantages CFDs offer over spot trades.

Key Takeaways:

• Crypto Contracts for Differences (CFDs) allow traders to take a market view on cryptocurrency price movements without owning the actual assets.

• CFDs offer the flexibility to profit from both rising (going ‘long’) and falling (going ‘short’) markets.

• Leverage in CFD trading can amplify both potential profits and losses, making it a high-risk, high-reward instrument.

• Crypto.com provides a wide range of crypto CFDs (40-plus) with features like 24/7 trading, real-time profit/loss tracking, and the ability to hedge spot holdings.

• CFD trading involves significant risks, especially in the volatile cryptocurrency market. It’s crucial to understand the mechanics and manage risks carefully.

• Traders can use CFDs to potentially maximise their trading power with less capital but should be aware of margin requirements and the risk of losses exceeding their initial investment.

• While CFDs offer advantages like capital efficiency and market flexibility, they require constant monitoring and a solid understanding of market dynamics.

What Are CFDs?

Contracts for Differences (CFDs) are a financial instrument allowing traders to take a market view on the price movements of cryptocurrencies without actually owning the underlying asset. They are an agreement between the trader and a broker to exchange the difference in the value of a cryptocurrency from when the trader opens the position to when they close it.

In other words, CFDs give traders exposure to an underlying asset’s price movements without owning the asset itself, allowing traders to take a speculative position. Additionally, CFDs give traders price exposure to manage price risk if they also own the underlying asset.  

How Do Crypto CFDs Work?

When trading crypto CFDs, traders are not buying or selling the actual cryptocurrency. Instead, they’re entering into a contract with a broker based on the cryptocurrency’s price. 

CFDs mimic trading their underlying asset — in other words, traders simply buy and sell CFDs as they would the underlying asset. For example, if a trader wants to buy the equivalent of 100 ETH, they’d buy 100 ETH CFDs, which allow traders to use leverage and either go long or short depending on which direction they think the price will go (we explain the concepts of leverage, going long, and going short below).

Here’s how it works:

1. Choose a cryptocurrency to trade, such as Bitcoin or Ethereum.
2. Decide whether the price will go up (go ‘long’) or down (go ‘short’).
3. Decide whether to use leverage, and how much.
4. Open a position by entering into a CFD with a broker.
5. If the prediction is correct, traders make a profit. If it’s wrong, they incur a loss.

One key feature of CFDs to be aware of is leverage. This allows a trader to open larger positions with a smaller amount of capital. While this can amplify potential profits, it can also increase risk of losses, including a trader’s entire investment. It’s crucial for beginners to understand and manage this risk carefully, so let’s dive in a bit more deeply to see how margin trading works.

What Is a Margin?

If a trader were to trade an ETH CFD with a 20% margin requirement, a position worth $1,000 would require a deposit of $200. 

A 20% margin will give 5x leverage; whereas, for example, a 5% margin would give 20x leverage.

While trading on margin lowers the cost of opening a trade, it can also be very risky, as it’ll amplify both the trader’s losses and gains, as CFD profits and losses are calculated on the full size of the trade.

Note that different markets and underlying assets may have different margin requirements. Learn more here.

What Does It Mean to Go Long or Short?

Going ‘long’ or ‘short’ with a crypto CFD refers to the position a trader takes based on their prediction of the cryptocurrency’s price movement.

Going Long: When a trader goes long on a crypto CFD, they’re predicting the price of the cryptocurrency will increase. Essentially, they are ‘buying’ the CFD with the expectation that they’ll be able to ‘sell’ it later at a higher price.

For example, let’s say a trader believes Bitcoin’s price will rise:

1. Bitcoin’s current price is $60,000.
2. A trader opens a long CFD position for 1 Bitcoin with a 20% margin (5x leverage), which costs $12,000.
3. If Bitcoin’s price rises to $65,000, they’d make a $5,000 profit (minus fees).
4. If Bitcoin’s price falls to $55,000, they’d lose $5,000 (plus fees).

Going Short: When a trader goes short on a crypto CFD, they’re predicting the price of the cryptocurrency will decrease. Essentially, they are ‘selling’ the CFD first with the plan to ‘buy’ it back later at a lower price.

Using Bitcoin again:

1. Bitcoin’s current price is $60,000.
2. A trader opens a short CFD position for 1 Bitcoin with a 10% margin that costs $6,000.
3. If Bitcoin’s price falls to $55,000, they’d make a $5,000 profit (minus fees).
4. If Bitcoin’s price rises to $65,000, they’d lose $5,000 (plus fees).

The key difference is in a trader’s market expectation:

• Long positions profit from price increases
• Short positions profit from price decreases

Why Trade CFDs?

Many traders find that CFDs offer them features that spot trading (i.e., buying a cryptocurrency at its list price) cannot:

• CFDs closely mimic trading in the underlying market. This allows traders to get exposure to the underlying asset’s price movements without owning the asset itself. 

• Additionally, CFDs allow traders to stretch their capital when trading with margin, as they only have to deposit a fraction of their trade’s full value to open a position.

• CFDs also allow trading both ways, where traders can go long or short.

More on how to trade crypto CFDs in the Crypto.com App below.

Step-by-Step Process: Trading CFDs in the Crypto.com App

Crypto CFDs are currently available in 70-plus countries. Traders can find the full list here to determine if crypto CFDs are available in their jurisdiction. To start trading, open a USD Fiat Wallet and accept the Terms & Conditions for CFD trading.

To start trading, users must first transfer funds into their CFD Wallet:

1. In the Leverage tab, tap the bottom drawer to open it.

2. Tap Transfer In.

3. Input the amount of USD to transfer and submit. If no funds are in the USD Fiat Wallet, tap Deposit to fund it first.

4. Users will receive a push notification when their transfer is complete.

Once the CFD Wallet is funded, it’s time to trade!

Follow the step-by-step process:

1. Select the underlying asset.
2. Tap Buy if predicting the price will go up (long), or Tap Sell if thinking it will go down (short).

3. Input the desired contract quantity or exposure to the asset.
4. Tap Place Order to submit the trade.

To monitor the CFD trade, follow these steps:

1. Tap the position on the price chart to view its performance. 

2. To view all positions, simply open the CFD Wallet by tapping the bottom drawer.

3. On the same screen, users can keep an eye on their Margin Health. The lower it is, the greater the risk of liquidation.

4. Tap [X] to close the position to realise profits or limit losses.

5. Or tap on the position to view more details.

What Are the Advantages of Trading CFDs With Crypto.com?

Trading CFDs with Crypto.com offers several advantages that make it an attractive option for many traders. 

Amplify trades with leverage: This allows traders to potentially increase their gains (and losses) by trading on capital-efficient margin. 

Extensive selection of crypto instruments: With over 40 crypto CFDs available, Crypto.com boasts the widest range of CFDs in the crypto space. This variety gives traders the flexibility to diversify their strategies and explore different opportunities in the crypto market.

Opportunities in all market conditions: Whether the market is bullish or bearish, traders can potentially profit from both rising and falling markets. 

24/7 availability on mobile: Allows users to trade anytime and anywhere, fitting seamlessly into today’s fast-paced, always-on digital world.

Intuitive interface: Traders can see their profit and loss move in real-time, providing immediate feedback and helping them make informed decisions quickly. 

Hedge spot holdings: For those holding cryptocurrency assets, Crypto.com’s CFD trading also offers the ability to hedge spot holdings by shorting the market, providing a potential safeguard against market downturns.

Industry-leading security: As one of the most regulated and trusted crypto platforms, it implements state-of-the-art security measures to protect users’ assets and data. This commitment to security and compliance can provide peace of mind for traders.

Conclusion

Crypto CFDs offer an innovative way to engage with the cryptocurrency market without directly owning the underlying assets. They provide flexibility, allowing traders to profit from both rising and falling markets, and the ability to amplify potential gains through leverage. Crypto.com’s platform stands out with its wide selection of crypto CFDs, user-friendly interface, and robust security measures.

However, it’s crucial to remember that CFD trading, especially in the volatile cryptocurrency market, carries significant risks. The use of leverage can magnify losses as well as gains, and the 24/7 nature of crypto markets requires constant vigilance. As with any financial instrument, thorough research and a solid understanding of the mechanics are essential before engaging in CFD trading.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Past performance is not a guarantee or predictor of future performance. The value of crypto CFDs and crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto CFD or crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.