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How to trade Bitcoin CFDs - Profit with leverage

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Bitcoin CFDs
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Crypto derivatives

Many forex brokers offer Bitcoin CFDs where traders can profit on the Bitcoin price direction. When you trade crypto CFDs, you don’t own the actual cryptocurrency; instead, you forecast whether the price will fall or rise against the U.S. dollar. You can trade Bitcoin CFDs with leverage up to 1:5 and profit on the market fluctuations.

In recent years, the demand for crypto derivatives has increased, and many brokers include cryptocurrency CFDs on their platforms. The simplicity of trading and quick access to the markets continue to draw many traders. Learning to trade CFDs is quite easy, but predicting the crypto markets is another story.

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How to profit with Bitcoin CFDs

When you trade Bitcoin CFDs, you don’t hold any coins. In fact, your account could be in fiat currency, such as USD, GBP or EUR. Once you open a Buy or Sell position, you will make profit on each pip that moves in your direction. For example, you might profit $1 or $10 per pip, depending on the size of your position.

The size of your position is the risk you take, and traders will usually decide their positions by a percentage of their total capital. For example, if you have a $2,000 account, you might risk 5% ($100) for every position you open on the broker’s platform.

When you trade on a traditional cryptocurrency exchange, your aim is to buy cheap coins and sell them when the price is high, thus profiting on the margin. With crypto CFDs, you don’t hold any coins; you are simply interested in what direction the price will go next.

  • You open a Buy position: you profit if the Bitcoin price rises
  • You open a Sell position: you profit if the Bitcoin price falls

If you choose to trade Bitcoin CFDs, you will also take advantage of using leverage up to 1:5 or 1:20, depending on the broker. This means instead of operating with $1,000 account, you can trade with $5,000 or $20,000. Thus, you can make more profit per pip, but your risk will also increase.

Fundamentals vs Price action

When you trade forex, you know that the price moves are usually prompted by economic or political events. On the other side, with crypto markets, the fundamentals are not as clear, and most of the trading is based on price action and speculation.

At times, the crypto market is quite volatile and unpredictable, which makes it interesting for big players, such as hedge funds. When the big sharks come to feed, you better be invisible.

What is Bitcoin

Bitcoin, also known as digital gold, is an electronic cash system that allows direct payments between wallets. Transactions could be approved in minutes without an intermediary financial institution. The cryptocurrency is used globally and is an alternative to all fiat currencies, such as U.S. dollars, Euros and Yens.

Even before Bitcoin, there were ideas for creating peer-to-peer cash systems, but Bitcoin was the first to solve the issue of double spending by adding proof of work. The digital transactions are verified by miners, and every transaction is stored on a public ledger, called blockchain. There are no physical bitcoins. In fact, bitcoins are algorithms with records of transactions.

The Bitcoin ledger started on 03 Jan 2009, and the mining machines have since been constantly guessing to find the right answer to math problems. The machine that finds the right answer first is the one designated to make the next update. The ledger is updated once every ten minutes by adding a new block on the chain.

When you transfer fiat currency via e-wallet, such as PayPal or Neteller, these companies keep track of all transactions in one centralised ledger. For example, when you use your PayPal account to send money to a friend, the company keeps data for both accounts, and after each transaction, it updates the ledger. At any point, the company in charge can reverse or refuse your transactions, and you can do nothing but open a dispute.

By using bitcoins, you can send money to anyone without asking permission from a government, bank or financial institution. You simply choose the amount in your Bitcoin wallet and send it to the other Bitcoin address. The digital wallet could be stored on a personal device, and you don’t need to trust a third party to keep your money safe.

With Bitcoin, instead of being one ledger that keeps track of who has how many bitcoins, there are millions of copies of that ledger on every computer running the Bitcoin full node software. These millions of copies all stay in sync, and even if half of the computers stop working, the ledger stays intact.

Blockchain is the name of that worldwide ledger. It is updated in steps. Each step is a block of new information that is attached, and they are all chained together mathematically.

Bitcoin vs. Bitcoin Cash

The idea of a decentralised payment system is great, but there is a problem with Bitcoin. With more people wanting to use bitcoins, the transactions are becoming slower and fees are increasing. To solve the problem, in July 2017, the majority of developers and mining pools voted for a new technology, SegWit2x, which verifies smaller amounts of data in each block.

Another group of miners and developers thought the SegWit2x was going in the wrong direction for the technology, and they decided to create a new digital currency, Bitcoin Cash. Basically, they resolved the issue of slow transactions by increasing the block size to 8mb. Transactions with Bitcoin Cash are supposed to work much faster, and fees should be insignificant, but some people raised concerns about the security of the hard fork.

Advantages of Bitcoin

  • Decentralised currency
  • Limited amount
  • Secure network

By being decentralised, Bitcoin allows people to exchange money without limits from governments or financial authorities. Therefore, many countries are looking for ways to ban the cryptocurrency.

One Bitcoin can be compared to 100 million Satoshi, and the total supply of Bitcoins is limited to 21 million. That means the miners cannot create bitcoins forever in the way governments print fiat currencies.

The more computers mining, the more secure the bitcoin network. Once you buy bitcoins, you can keep them in digital wallets or use offline hardware wallets, such as Ledger Nano or Trezor.

How to buy Bitcoin

To buy bitcoins, you can register an account at a cryptocurrency exchange, such as Coinbase or Bitpanda. There are hundreds of exchanges, and most of them work with VISA and MasterCard or e-wallets, such as Neteller and Skrill. Basically, you are using your fiat currency to buy cryptocurrency.

If you decide to invest in Bitcoin, you must be aware of the extreme volatility. The Bitcoin price could change by 50% in just one day.

You might have heard that bitcoin is anonymous, and that is true when it comes to peer-to-peer payments on the bitcoin network. When you buy bitcoins from an exchange, in most cases, you will have to verify your identity.

To store your cryptocurrency, you can use the web wallet offered by the exchange or download a desktop wallet and install it on your device. You must be aware that if your device is stolen, your bitcoins will be gone. The safest way to store your bitcoins is a hardware wallet, such as Trezor or Ledger Nano.

Blockchain Technology

Thanks to the invention of Bitcoin, by the anonymous group Satoshi Nakamoto, we now have blockchain technology. It is a new type of internet, which allows digital information to be transferred between parties but not copied. Bitcoin itself is a great invention, but the underlying blockchain technology has much greater potential.

The Ethereum blockchain, for example, can virtually decentralize any application by allowing people to build smart contracts. These self-executed contracts can work on a public digital ledger and be programmed to record not just financial transactions but everything of value.

What is Ethereum

The Ethereum blockchain network enables developers to build and run decentralized apps. Any app, such as YouTube, Facebook or PayPal, controlled by a central entity could be decentralized on the Ethereum platform.

Similar to the Bitcoin blockchain, the Ethereum network runs by nodes. These are computers that keep full copies of Ethereum blockchain. The nodes are compensated by users and app developers with crypto tokens called Ether (ETH).

The logic bricks in these decentralized apps are called smart contracts. When running on the blockchain, smart contracts are self-programmed. To interact with these contracts, you send them transactions with some data to specify which function you want to invoke.

Ethereum vs. Bitcoin

If Bitcoin is the digital gold, then in an abstract way, Ether is the digital oil. The Ether cryptocurrency (ETH) is the fuel that makes the apps run on the Ethereum blockchain.

Bitcoin is a developed Dapp programmed to work as a peer-to-peer electronic cash system, and the Bitcoin blockchain stores each transaction. Ethereum, on the other hand, is open software that anyone can use to build all kinds of decentralized apps.

What is Dapp

Let’s take for example YouTube, which is a Google company and operates centralized with a CEO in charge. The free platform allows publishers to upload videos. By giving Likes (thumb up), the users can value the content. Based on the number of likes and comments, YouTube ranks the top videos when users search on the platform.

The YouTube publishers monetize when they join AdSense, the Google ads program. Basically, at any time, YouTube can stop the monetization on a videos or even completely remove the videos from that publisher’s channel. In such cases, the publish can’t do much but open a dispute and eventually the videos may be restored.

A Dapp project on the Ethereum network would work in a different way with no central entity in control but instead a peer-to-peer protocol. The users on a decentralized video network would be able to share any content they have stored on their devices. Advertisers, viewers, and content creators would be able to engage directly.

Instead of giving Likes to your favourite publishers, you could give them Likecoins in a form of tokens. Thus, people can create a fair environment to share videos with no intermediary, fewer ads (or no ads), and more earnings for the best publishers.

How to buy Ethereum

Developers and entrepreneurs use the Ethereum blockchain to build decentralized applications based on smart contracts. To have your app running, you need computing power, so you pay for it with Ethers. The more power you use on the network, the more Ethers you have to spend.

With more developers using the Ethereum blockchain, the demand for Ethers is increasing, which results in higher prices on the crypto exchanges.

Traders can buy Ethers as an investment or trade Ethereum CFDs to profit in the short term. Both ways carry significant risk for your investment.

As we know, the cryptocurrency Ether (ETH) is used to fuel the Ethereum network, and if you believe these Dapp projects have future, you can buy Ethereum coins as an investment. The cryptocurrency is offered on every online exchange, and you just need to choose one and register for an account. Some of the most trusted crypto exchanges worldwide include Coinbase, Bitpanda, Bittrex and Kraken.

After your account on the exchange is verified, you can purchase coins directly with your debit card. You can also fund a U.S. dollar wallet and buy Ethereum with it. To store your Ethers, you can use a web wallet provided by the crypto exchanges or a desktop wallet, which you download and install on your computer. A hardware wallet, such as Trezor and Ledger Nano, is trusted to be the safest way to store your Ethers.

The Crypto Market

You must be aware the cryptocurrency market is extremely volatile, and the price can change by a couple of hundred U.S. dollars in a day. Below, you can see a daily chart from Kraken that follows the last days of 2017 and the opening days of 2018. On the 1st of Dec 2017, the ETH was traded for around $460.00, and on the 13th of Jan 2018, it reached $1600.00, just to drop by 50% a few days later.

With the Ethereum, cryptocurrency offered by exchanges for sale, hedge funds, speculators and retail traders join the crypto market in a hunt for profit. When the wolves join a market, you can expect bubbles and bloodbaths, which we already witnessed in 2017 and 2018.

The Ethereum price could be affected by the release of new projects on the blockchain, as well as government decisions for cryptocurrency regulations.

Bottom line

If you have invested in Bitcoin or any coins, you know Bitcoin is the base cryptocurrency. There are thousands of different altcoins on the cryptocurrency market, and many of them are backed with bitcoins. If you don’t have any cryptocurrency, you must first buy bitcoins, and then you can trade your bitcoins for any other altcoin.

You can also trade Bitcoin CFDs with leverage 1:5. In such cases, you don’t have to buy bitcoins; you just use your fiat currency in your broker’s account.

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