As crypto currencies grabbed the attention of the trading community approximately 12-months ago, many in the markets were not ready for this new asset class. To trade most crypto currencies, investors needed a wallet that would allow them to physically exchange their dollars or euros for bitcoin or ether. Many crypto’s like ripple were not available to investors in specific countries in their sovereign currency. This meant they needed to swap their sovereign currency for a crypto currency, and then swap one crypto currency for another, doing a cross crypto currency trade. Today, the market has advanced significantly with many companies like iFOREX focusing on trading the cryptocurrency market.
Trading Crypto Currencies Using CFDs
Many reputable brokers are now offering investing in crypto currencies through contracts for differences. Instead of physically purchasing a crypto currency and holding it in a wallet, you can use a contract for difference to track the movements of a cryptocurrency. A contract for difference is a security that tracks the movements of another underlying security. For example, a CFD on bitcoin will track every bitcoin price change. The benefits of a CFD is that it is a leveraged product that only requires that you be responsible for the difference between where you purchased the CFD and where you sell the CFD.
What is Leverage?
When you trade using a CFD, your broker will offer you leverage. This requires a margin account where you use borrowed capital to purchase a CFD. The borrowed capital is embedded in the CFD, and allows you to use only a portion of the value of a product to purchase a CFD. For example, a CFD that has leverage of 10 to 1, will allow you to post only $500 for a product that has value of $5,000. So, if bitcoin is trading at $5,000 you will only need to post $500 to purchase a CFD on bitcoin. There are significant benefits to using CFDs to purchase crypto currencies. The most enticing is your return on capital.
For example, if you sell bitcoin and the price declines from $5,000 to $4,500, the return you will receive if you use cash is 10% ($500 gain divided by the $5,000 you posted to make the trade). If you use a CFD instead, the returns will be 10-times that number. If you post $500 with leverage of 10 to 1, your return will be 100% ($500 divided by $500).
The crypto currency market has changed significantly over the past 12-months. When crypto currencies made headlines a year ago, there were very few ways for investors to trade the crypto market. Now, online trading is advanced allowing traders to use several different methods including contracts for differences. Many forex brokers have introduced crypto currency trading using CFDs, which allows investors to chart the movements of crypto prices using the tools they use to trade sovereign currencies. 1-year ago it was difficult to perform technical analysis on cryptocurrency. Today, the online market has changed allowing investors full access to crypto currency investing.