Cryptocurrency futures were just launched and everyone who loves to trade is very excited about them. Cryptocurrency CFDs are the tradable contracts used in futures trading because they make trading easier. CFDs allow you to trade and profit from the price of cryptocurrencies without you having to buyi any cryptocurrencies. The best part? They allow you to profit from the price of cryptocurrencies going down as well! What is a CFD?
CFD stands for Contract for Differences. CFDs are contracts that specify the fact that the differences in costs in futures contracts will be handled in cash, instead of the actual commodity. If that sounds too complicated, don’t worry – you just need a basic idea of futures trading to be able to grasp what we are talking about here. Let’s look into what futures trading is and the importance of cryptocurrencies CFDs will become apparent.
We will use a simplified example of futures trading. In reality, things are a bit more complex but the basic principles remain the same. Futures trading was initially promoted because it allowed farmers to minimize their risk. Here’s how a futures contract would work. A farmer sows seeds enough for 10 bushels of wheat, and he will be able to sell it in a year once it has grown enough. Now, the current price of wheat per bushel is $10.
The price of wheat keeps going up and down. The farmer is afraid that by the time his wheat is ready for trading, the price may have fluctuated too much and the farmer will not make a profit. To remove this volatility, the farmer sells a futures contract for his wheat on the market. He says that one year later, he will sell 10 bushels of wheat at $11 a bushel. Now, imagine there is a wheat trader. He sees this offer, and he thinks that in a year, the price of wheat will be more than $11 a bushel. He ends up buying the contract, saying that he will buy the wheat at $11 a bushel.
Now, in this case, the farmer has no risk, since he has determined the price of the wheat. There is one risk though – that in one year, the price of wheat will be $15 per bushel and the farmer will make less money than that since he locked in the futures contract at $11 a bushel, so he won’t make as much money as he would have otherwise. But he does know for sure that he will get a minimum of $11 per bushel no matter what happens.
Now, in a CFD, it is determined that whatever the price difference comes in at the end of the one year contract for example, it will be settled in cash. Instead of delivering the actual wheat, the difference in cost will be covered. So if the price of wheat goes up, the farmer will end up paying the difference to the trader. If the price is now $20 per bushel, the 9$ per bushel difference will be given by the farmer to the trader. On the other hand, if the price goes lower the farmer gets paid. If the price is now $5 per bushel, the $6 difference will be paid to the farmer by the trader. The actual commodity is not traded. CFDs for Cryptocurrencies
That is what CFDs offer for bitcoin. You agree to buy or sell bitcoin at a later price for a set date. If the price goes above the amount you decided to buy it at, you profit. If the price goes below the price you decided to buy at, you will incur a loss. On the other hand, if you think the price of cryptocurrency is going down in the future, you can offer to sell it at a set date. In that case if the price goes lower than your selling price, you profit, but if the price goes higher, you will incur a loss. Since it is a CFD, you won’t actually have to buy or sell the bitcoins – you will just have to settle the difference.