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You can’t turn on the news or scroll through social media these days without seeing a story about cryptocurrency. If it’s not the latest Ethereum price update, it’s a story about US President Donald Trump signing an Executive Order to establish a Strategic Bitcoin Reserve. Essentially, there’s almost no escaping the crypto industry at the moment.
Crypto Prices Never Stand Still
With all the hype surrounding cryptocurrencies, you might have considered buying some coins. Plenty of people have, but more than a few did so without knowing the basics. That’s a mistake because, like other financial assets, the value of cryptocurrencies can increase and decrease.
In fact, according to ActivTrades, an online broker specialising in crypto CFD trading, Bitcoin et al. are part of the “most volatile asset class in history”. In layman’s terms, this means that the price of cryptocurrencies fluctuates more than any other financial asset. This includes Forex (currency pairs), which are notoriously volatile.
We’re not saying volatility is a bad thing. Price fluctuations can be positive and negative. Indeed, if you look a Bitcoin’s price over time, you’ll see that downswings have been followed by upswings greater than a single stock or commodity typically experiences in the short term.
That’s the nature of cryptocurrencies at this point, and it’s the reason why crypto CFD trading is becoming increasingly popular.
Investing vs. Trading Cryptos
For context, the traditional way of participating in the cryptocurrency markets is by buying coins from an exchange. This gives you ownership of the coins (i.e., the asset), which means you make a profit if its value increases above the price you paid. For example, if you bought 1 BTC at $50,000 and the price went up to $52,000, you’d make $2,000 if you sold the coin.
This remains the most popular way to speculate on Bitcoin et al. However, it’s not the only way. Online trading platforms have added cryptocurrencies to their list of available assets over the last five years, which means you can now use financial instruments known as contracts for difference (CFDs). CFDs give you exposure to an asset without taking ownership of it.
In technical terms, a CFD is a derivative, which means it derives its value from an underlying asset. The asset, in this case, is a cryptocurrency’s price. Therefore, when you trade crypto CFDs, you’re trading against the price of a coin rather than owning it. The benefit of this is that you can take either side of the trade. You can go long if you believe the asset’s price will increase, or you can go short if you think it’s going to drop.
You can’t do this if you own coins because you only profit if the price increases. That’s why CFD crypto trading has gained traction over the last few years. What’s more, because online trading platforms allow you to enter and exit positions in seconds, it’s possible to move in sync with the crypto market’s price fluctuations. That’s easier said than done, but the point here is that it’s possible, which is why more people are using this trading strategy.
