Bitcoin and cryptocurrencies have long been more than just a technological curiosity. At present, cryptocurrencies, also called cryptocurrencies, have consolidated their position in global finance and are used as a means of payment and, what is especially important in the context of this article, they are treated as a full-fledged asset class in the portfolios of investors around the world.
2021 is certainly being an interesting year for cryptocurrency enthusiasts. The volatility in such assets is huge, for example, Bitcoin has already doubled its value since the beginning of this year, and then fell by 50%. In the case of Ethereum, price swings of more than 10% daily are becoming very common.
Due to the growing popularity of cryptocurrencies, especially among beginner investors, in this article we will discuss one of the most accessible forms of investing in them: cryptocurrency CFDs.
Why invest in cryptocurrencies? The answer is “volatility”
Probably the most important argument in favor, and paradoxically also against investing in cryptocurrencies, is the gigantic volatility that characterizes this type of asset. A daily volatility of 1% is a lot for most traditional financial instruments. By way of comparison, in 2021, you can calculate with the fingers of one hand the days when the daily variation in Bitcoin was less than 3%.
Most novice investors are most convinced by the huge potential return rates that can be achieved in a short time by investing in cryptocurrencies, but remember that the greater the volatility of a given instrument, the greater the investment risk associated with it (and the greater the potential loss).
In the case of cryptocurrencies, there are other risks or problems, such as the complexity of the issue, the need for proper mining equipment, the absence of appropriate legal regulation, and customer confidence in cryptocurrency exchanges.
Cryptocurrency CFDs are therefore worth a look as they are readily available to any potential investor and, in the case of XTB, are part of the offering of a global broker regulated by major European financial regulators such as KNF, FCA or CySEC.
What are CFDs?
CFD stands for Contract for Difference. This is a very popular financial instrument, which is something like an agreement between the issuer of the contract (e.g. XTB) and the investor, in which both parties agree to pay each other the exchange differences at which the trades have been closed.
An investor has made a trade to buy a CFD at a price of $ 1000. He then decided to close the investment position when the price of the instrument rose to $ 1,020. In this case, the difference between transaction fees is $ 20 and the investor’s investment account will be increased by this amount. Of course, if the price went down to $ 980 instead of rising and the investor then decided to close the trade, it would mean a loss of $ 20 for him. Important: for the clarity of the example, we assume that there are no costs or financial leverage.
The CFD is a derivative, i.e. a type of financial instrument whose price depends on the price of the underlying asset, which can be currency pairs, commodities (gold, oil), stocks or cryptocurrencies. Important: when trading CFDs, the trader does not become the owner of the underlying asset, he only settles the exchange differences, as in the example above.
Possibility to invest in drops
One of the advantages of CFDs, especially important for trading highly volatile assets, is the possibility to invest not only in increases (what is called a long position), but also in price decreases (short holding!). Therefore, if you believe that the price of, for example, Bitcoin will fall, you can take advantage of it – simply open a short position on Bitcoin CFDs.
Leverage is a mechanism that is part of CFDs. It allows you to commit only part of the capital that would be needed in a traditional investment. The leverage size varies with different providers – at XTB the leverage for CFDs on cryptocurrencies is 1: 2, which means that the investor only needs 50% of the transaction value to open an investment position. Cryptocurrency CFDs have extremely low leverage, but for example gold CFDs have a leverage of 1:20 (the investor needs 5% of the transaction value for the protection of the trade).
Important: Remember that leverage can be a great convenience for investors, but it also increases risk (the higher leverage, the higher risk).
Coverage of benefits and limitation of risk
We have mentioned earlier that cryptocurrencies are incredibly volatile instruments, which can mean both big profits and big losses for an investor. Therefore, it should be especially important for investors using CFDs on cryptocurrencies that the XTB platform has built – in risk management tools-SL (stop loss) and TP (take profit) orders.
Stop loss (SL) – This is a defence order that traders use to limit the risk of trading. An SL order after reaching the level specified by the investor initiates the automatic closing of the position, even if the trading platform is off.
TP (take profit) – An order similar to the SL, except that it is used for profit collection.
Minimum trade size
One of the following arguments for choosing CFDs as a way to invest in cryptocurrencies is the possibility of making small trades. For example, the minimum position that can be opened on XTB on Bitcoin CFDs is 0.01. This means that to open a minimum investment position in this instrument, it is sufficient for the investor to have ~ $ 160 (at the time of writing, BTC is worth ~ $ 32,000).
Not for everyone
Remember that cryptocurrency CFDs are not for everyone. Investors who are interested in a long-term investment in cryptocurrencies (cashing the swap), as well as investors who have a high risk aversion (high volatility means high risk) should consider whether CFDs are appropriate for them.
CFDs on cryptocurrencies at XTB
With the increasing popularity of cryptocurrencies, the offer of cryptocurrency CFDs on XTB has also recently evolved. We have lowered transaction costs on the most popular ones and reduced the minimum transaction level on all cryptocurrency CFDs.
Currently, at XTB you can invest in CFDs on:
- Bitcoin Cash
- Ripple (XRP)
How to keep up with key cryptocurrency market information and events?
It’s very simple, just install our xStation platform. In the News tab our research Team regularly comments on the cryptocurrency market situation in the form of market news, analysis or webinars on the current market situation.
Key information about Crypto CFDs on XTB
- Open a risk-free demo account in seconds
- Quick account opening (~15 min)
- CFDs on 5 popular cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, Ripple and Litecoin.
- Possibility to sell short, that is, to make money when cryptocurrencies fall in price.
- Leverage 1: 2
- Trading 7 days a week
- Possibility to hold an open position for 365 days
- Security of funds and supervision