Bitcoin CFD Trading
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Bitcoin CFD Trading

If you aren't keen to get into futures and standard margins don't excite, check out CFDs - they are expensive, but leverages are high and they are simple to use.

Published: August 15th, 2017 | Author: David Marc

In our previous article we examined bitcoin margin trading, and focused on mainstream bitcoin exchanges that offer leverages between two to three times account equity. These larger positions are financed via lending markets or directly from the broker, and the borrower actually controls real world bitcoin, which is bought and sold directly on the exchange.

In this article, we will examine a bitcoin derivative known as the CFD, or contract for difference.

Bitcoin CFDs

Bitcoin CFDs are derivative instruments, meaning that the underlying asset - bitcoin, ethereum, litecoin, and the like - is not actually being bought and sold. Rather, a contract is created between a buyer and a seller by which the seller agrees to pay the buyer the difference between the current market value of the underlying asset, and the market value when the buyer exits the contract. Hence, contract for difference.

Bitcoin CFDs are highly leveraged, with a typical range from 10:1 until 30:1. It goes without saying that these leverages are extremely risky, particularly if account margin is low. (A market position of 1 bitcoin on 10:1 leverage isn't that risky if there is an account equity of 5 bitcoin; if the account has only .2 bitcoin you are playing Russian Roulette).

As it pertains to the CFD market in general and cryptocurrency CFD brokers in particular, brokerages almost always act as the market maker, or the counterparty to each trader. A properly run CFD broker will make their money entirely from the spread and funding rates, balancing buy and sell orders to equilibrium, and hedging on third party exchanges if there is an imbalance. The spreads are generally between $7-$20, which, when trading an asset worth $4,000, is a relatively low amount. Keep in mind, however, that this spread is amplified due to the leverage, which we illustrate below.

Let's imagine you have an account with $800, and you would like to buy two bitcoin at $4,000 each. At a spread of $20, you start with a p/l of -40. Now, in order to maintain the position, your account equity - the original margin of $800 plus the p/l - must stay above $400 or the account is liquidated. You are already 10% of the way to liquidation, and if bitcoin drops by $180, a large but by no means unheard of amount, you are liquidated.

CFD brokers also add a funding premium to your order, similar to those discussed in our previous bitcoin margin trading article. The size of the premium varies; the benefit is, however, that if your position is against the prevailing market wisdom many brokers will pay you a premium, a mechanism to help balance their book.

There are a few distinct benefits to bitcoin CFDs. The high leverages will be attractive to big profit seekers not scared off by the heightened risk. The CFD model allows for contracts on any instrument, and most of the brokers offer trading on multiple asset classes - so you can trade forex with bitcoin. Most of the CFD brokers also service non-crypto clients, meaning all standard payment methods are integrated, and trades may be collateralized in your local currency.

Bitcoin CFDs and Fraud

There is a troublesome aspect in this market maker model. If the brokerage is dishonest or simply unable to properly hedge their positions, profit/loss becomes a zero sum game against the customer. And there are a number of tools that the dishonest broker might employ to limit losses. There is generally a lack of transparency when it comes to prices; unlike exchanges where the market sets the price via the exchange, the broker has more control over the spot price. Traders might also experience excessive slippage, a difference between the execution price and the price at which an order was placed. This happens at the most ethical of brokerages, and it is deliberately done at the worst of brokerages.

The Best CFD Brokers out of the Bunch

There are some solid bitcoin CFD brokerages, led by Evolve Markets for US traders and SimpleFX for everyone else. Both brokerages run on the metatrader 4 platform which sets the bar in the forex and CFD markets, both have very tight spreads, both have relatively low funding rates, and both seem to run the books properly. Evolve Markets does not accept fiat deposits; US traders insistent on collateralizing trades in USD should check out FXChoice, but perhaps take the plunge and buy bitcoin if you are looking to invest in the cryptocurrency market.

We should also note that SimpleFX does not offer a bitcoin mini contract meaning the minimum deposit required to purchase a contract for one bitcoin is 0.1 btc or equivalent fiat, a relatively high deposit amount. For those who hold bitcoin, Evolve is a good alternative. Fiat holders, check out plus500.

Our next article will take a look at bitcoin futures exchanges. Like CFDs, bitcoin futures offer traders very high leverages - the highest leverages actually - but operate on a standard exchange model and thus avoid potential conflicts of interest associated with market makers.

Bitcoin Price (USD): 853.48