Crypto CFDs offer retail investors the best opportunity to gain significant exposure to popular crypto assets such as Bitcoin or Ethereum. Let’s delve further into Crypto CFDs, understanding what they are and why they might outshine conventional methods of purchasing and trading cryptocurrencies through a crypto exchange platform. 

What are Crypto CFDs?

CFD, abbreviated from Contract for Difference, is a financial product that offers retail investor accounts exposure to an underlying asset without owning it. A CFD is a derivative that reflects the price of the underlying asset. This allows investors to speculate on the asset’s price and open a long or short position without owning the asset. 

In retrospect, Crypto CFDs are derivatives that mirror the price of cryptocurrencies like Bitcoin, Ethereum, Solana, Cardano, and others.

CFD brokers extend these derivative offerings to retail clients, alongside forex, equities, and other CFD products.

What are Cryptocurrencies?

Cryptocurrencies are digital assets that leverage blockchain technology. They benefit from features like:

• Decentralization – Cryptocurrencies are decentralized by design. All transactions are validated without intermediaries such as banks or governments.
• Transparency – All transactions are recorded on the blockchain and are accessible to the public at all times.
• Immutability – Approved transactions cannot be altered or tampered with.
• Security – Decentralized networks rely on collective consensus rules for security encoded in the system, eliminating single points of failure.
• Efficiency – Without intermediaries, crypto transactions incur lower costs than traditional value 

Why is Cryptocurrency Trading So Popular?

The popularity of crypto trading skyrocketed in 2017 when Bitcoin hit the $20,000 mark, setting a record that stood for three years. At the time, thousands of tokens were launched via initial coin offerings (ICOs), fueling a wide range of decentralized projects.

Here are several reasons why crypto trading is popular:

• Volatility – Cryptocurrencies are highly volatile, offering the potential for high returns. Even today, large-cap crypto assets like Bitcoin can experience double-digit price fluctuations daily. Over time, digital currencies can yield impressive returns.  For instance, from 2019-2024, Bitcoin has surged over 1,800%, Ethereum by 3,300%, and Solana by over 15,000%. Such performances induce the fear of missing out (FOMO), attracting traders who aim for high returns.

Inflation hedge – Some cryptocurrencies have a limited total supply, making them good at hedging against inflation due to their built-in scarcity.  Bitcoin exemplifies this with only 21 million coins ever to be mined, with over 93% already in circulation. Following its last halving event in April 2024, Bitcoin’s stock-to-flow (S2F) ratio — a measure showing the time needed for a commodity to achieve the current supply; positions this digital currency as scarcer than gold. This is why Bitcoin is often referred to as digital gold.

Diversification – Cryptocurrency assets provide diversification due to their low correlation with traditional assets such as stocks and gold. Bitcoin often shows zero correlation with the S&P 500 index or gold.

• 24/7 market access – Unlike stocks and forex pairs, cryptocurrency trading is available 24/7, around the clock.

• Hype – Cryptocurrencies symbolize innovation. Investors aim to enhance financial and tech literacy by grasping concepts such as Web3, decentralized finance (DeFi), and non-fungible tokens (NFTs). Trading cryptocurrencies offers a glimpse into the future.

How Does a Crypto CFD Work?

A crypto CFD is a contract between a trader and a broker. The trader can profit by accurately predicting the price movement of a cryptocurrency after opening a position. If the price moves against the prediction, the trader incurs a loss, deducted from their deposited funds.

Crypto CFDs represent popular crypto trading pairs like  BTC/USDT, ETH/USDT, BTC/EUR, SOL/USDT, or BTC/GBP.

It’s essentially a bet on price movement. Traders expecting a rise BUY the CFD (going long), while those anticipating a drop SELL the CFD (going short).

Below is an example of a long position. If the trader closes his position when the price is fluctuating within the green rectangle, he secures a profit. If he closes the position when the price is in the red zone, he incurs a loss. The size of the profit or loss depends on how far (or how many pips) the close price is from the opening price.

Here’s an example of a long position: If the trader exits when the price fluctuates within the green rectangle, they make a profit. Exiting in the red zone results in a loss. The profit or loss amount is based on the distance (in pips) between the closing and opening prices.

If the price moves against a trader, their position will automatically close when their balance can no longer cover the unrealized loss. Otherwise, the position can remain open indefinitely. A holding rate is debited or credited to your account for holding the crypto overnight. These are finance charges incurred by the broker and passed along to you.

Here are a few common aspects of a CFD that you should know about:

• Ask price is the price at which traders can buy a CFD.
• Bid price is the price at which traders can sell a CFD.  
• Spread is the gap between ask and bid prices, acting as a broker’s fee.
• Leverage is an option that enables traders to increase the order size by depositing only a percentage of the entire position. 

The Role of Fiat Currencies in Cryptocurrency CFDs

When trading cryptocurrency CFDs, fiat currencies play an important role as they act as the baseline for trading pairs. These pairs typically involve a cryptocurrency and a fiat currency like BTC/USD or ETH/EUR. The fiat currency acts as a stable point of reference, helping traders assess the cryptocurrency’s value in real-world terms. This is essential as cryptocurrencies are highly volatile by nature, making fiat currencies a more stable benchmark for evaluation.

Fiat currencies also play a key role in margin requirements for leveraged cryptocurrency CFDs. When you open a leveraged position, the margin is calculated in fiat currency. This approach anchors your trade in a stable currency, bringing clarity and stability to margin calculations and profit/loss assessments.

Crypto CFDs Leverage

When using leverage, you ‘borrow’ funds from the broker to increase your position size. Your personal contribution, referred to as margin is the amount from your account reserved to keep the trade open. For example, with a 10:1 leverage, you need a 10% margin. The remaining position is funded through ‘borrowed’ money. 

Here is the margin requirement for other leverage scenarios:

The above illustrates how margin and leverage work together. Given the inherent volatility of cryptocurrency CFDs, maximum leverage usually reaches 10:1 or lower. Keep in mind that while leverage can amplify potential returns, it also increases risks and losses if you trade the wrong direction.

How is Trading Cryptocurrency CFDs Different?

Since cryptocurrencies aren’t controlled by governments or corporations, trading them differs from traditional assets such as fiat currencies, commodities, or stocks.

Here are some aspects that you should know about when trading cryptocurrencies:

• Volatility – Cryptocurrencies are substantially higher in volatility compared to forex pairs and even small-cap stocks.

• Bitcoin dominance – Bitcoin makes up more than 50% of the total crypto market cap. In the short and medium term, other crypto assets (commonly referred to as altcoins)  usually mirror its movements.

• Fundamentals – Cryptocurrencies are driven by different types of fundamentals compared to traditional assets. Their supply mechanics are encoded in their blockchain systems, while the main events affecting prices may vary. For example, investor sentiment can be very sensitive to major regulatory updates affecting crypto assets.

What Does Affect the Price of Crypto CFDs?

Crypto CFDs mirror the performance of the underlying cryptocurrencies. Here are the main factors affecting the cryptocurrency market:

• Tokenomics — This term refers to the economics and design of a crypto asset, covering aspects like its supply, inflation rate, and initial distribution. Investors favor crypto assets with restricted supply and minimal issuance rates, essential for long-term viability.
• News and Events – Events such as regulatory decisions, hacking attacks, project launches, expert comments, and more can influence cryptocurrency prices. For instance, regulatory pressure on privacy coins like Monero (XMR) has greatly impacted their value. Most privacy coins haven’t been able to leverage the bull run of the broader crypto space.

• Use and Adoption — High adoption of a cryptocurrency drives up its price. Tokens have various use cases within ecosystems spanning decentralized finance (DeFi), gaming, crypto AI, staking, and more.
• Social media — Having a strong social media presence is very important for crypto projects, especially on platforms like X (formerly Twitter), Telegram, and Discord. When a crypto project captures the attention of the community, its price can experience volatility.
  

Why Trade Crypto CFDs?

There are several ways to get exposure to cryptocurrencies, including buying crypto directly, trading crypto futures and options, or buying Bitcoin or Ethereum exchange-traded funds (ETFs). While each method has its pros and cons, here are some of the reasons why many traders prefer crypto CFDs:

Wealth of Trading Resources

Crypto CFD traders have access to a wide range of resources, such as educational materials, interactive courses, advanced trading terminals with real-time charts, historical data analysis, multiple order types, risk management features, predictive model software, trading bots, and more.

Volatility

Crypto CFDs mirror the price of underlying cryptocurrencies and provide the same volatility. Despite their large market capitalization figures, top crypto assets like Bitcoin and Ethereum are still highly volatile. For example, in March 2024, Bitcoin’s 30-day volatility was at the highest level since the end of 2022.

Diversification

Traditional crypto exchanges focus solely on crypto trading. On the other hand, many crypto CFD brokers not only offer crypto options but also list forex pairs and equity CFDs. This provides traders with the opportunity to create a diversified portfolio..

Traders can mix volatile crypto assets with stable markets like major forex pairs via CFD brokers, allowing trading of various asset classes on a single trading platform.

Lower Costs

Many reputable CFD brokers offer very low spreads. Trading fees on Coinbase can reach 0.6%, while a decentralized exchange (DEX) like Uniswap charges 0.3%. Crypto CFDs usually have a small commission, sometimes as low as 0.25% commission. These low fees make a difference for active traders, like scalpers or day traders.

No Physical Ownership

With crypto CFDs, you don’t need to worry about holding your crypto funds safely. For physical crypto, you must choose between custodial wallets, non-custodial wallets, hardware wallets, paper wallets — you name it. Despite the complexity, many wallets are vulnerable to hacking attacks. 

Flexibility

Crypto CFDs make it simple to open and close positions in any direction. Traders can customize their experience with various order types.

Additionally, many CFDs offer demo accounts to train your skills and test strategies.

Competitive Spreads

Brokers aim to grow their client base by reducing spreads, making crypto CFDs appealing. 

The spreads of crypto pairs vary based on the USD price and liquidity of the assets. For example, Bitcoin CFDs typically have a spread of 1.1, while Solana’s CFD spread is about 0.01. Although it appears Solana’s spread is smaller than Bitcoin’s, the price per Bitcoin is so much larger that the Bitcoin spread is actually tighter when figured as a ratio to the price.

Bitcoin : 1.1 spread / 60,000 price = 0.000018

Solana: 0.01 spread / 140 price = 0.000071

Either way, both spreads are really tight making them ideal for shorter-term traders.

Accessibility

Crypto CFDs are accessible to anyone with an internet connection located in a jurisdiction where CFD trading is legal. You can trade 7 days a week, 24 hours a day.

Even forex trading with many CFD brokers is not available on the weekends as it trades 24/5.

In the case of traditional assets like stocks, trading hours are limited each day. As a result, opening markets can often form price gaps caused by unexpected events or changes in sentiment that occurred while the market was closed.

The 24/7 access makes trading cryptocurrency CFDs a preferred option for traders.

Liquidity

The crypto CFD market is very liquid due to the large volume of trades being executed at any given time, facilitating faster execution at desired prices.

Crypto CFDs have become very popular, attracting traders with different risk profiles and trading styles.

The Ability to Go Long or Short  

Unlike buying crypto directly, crypto CFDs offer the ability to go long or short, providing opportunities to profit or hedge during bearish markets.

You can’t implement short strategies on traditional crypto spot exchanges. To make this possible, some of these crypto trading platforms offer futures trading.

Margin and Leverage

Crypto CFD trading allows for the use of leverage, allowing traders to open larger positions with a fraction of the capital, amplifying both potential gains and losses.  

For example, a 10:1 leverage lets you open a $1,000 position with only $100 of your own funds.  

No Contract Expiration Date  

Unlike options or futures, cryptocurrency CFD trading doesn’t involve an expiration date, allowing traders to hold positions as long as they want.

Note that some CFD brokers may charge a small finance fee for holding positions overnight. 

Types of Crypto CFDs

Crypto assets are categorized based on multiple criteria.

For example, there is Bitcoin (BTC) CFD on one side and altcoins on the other side. Altcoins comprise of all non-Bitcoin cryptos, such as Ethereum (ETH) CFD, Cardano (ADA), Avalanche (AVAX), Litecoin (LTC), Chainlink (LINK), or Uniswap (UNI). When 75% of the top 50 coins perform better than BTC for 90 days, the crypto community calls it an altcoin season.

Source: Blockchain Center

The distinction between coins and tokens often creates much confusion. Coins are cryptocurrencies with their own blockchain, e.g. BTC, ETH, and LTC. On the other hand, tokens are built on top of existing blockchains and have certain functions within their ecosystems, e.g., LINK, UNI, or Polygon (MATIC).

Cryptocurrencies are also categorized based on sectors like DeFi, gaming, AI, meme coins, or infrastructure.

Another important criterion is the market cap:

• Large-cap coins have a market cap of $10 billion or higher and are regarded as lower-risk investments.
  Examples: BTC, ETH, ADA, SOL, Dogecoin (DOGE).
• Medium-cap coins have a market cap between $1 and $10 billion.
  Examples: UNI, MATIC, LTC.
• Small-cap coins have a market cap below $1 billion.
  Examples: Axie Infinity (AXS), EOS, NEO.

Crypto CFD Example

Let’s illustrate how crypto CFDs work with an example.

BTC/USDT is the most popular crypto CFD pair. Let’s say that the bid price of Bitcoin is $65,498, and the ask price is $65,500. 1 CFD of Bitcoin is equivalent to the value of 1 Bitcoin. If you have $1,000 in your account and are bullish on the price of BTC, you can open a long position at $65,500.

With 2:1 leverage, you would double your buying power, opening a position of $2,000 with a 50% margin requirement.

If the price of BTC increases to $68,500 over a few days, your position would gain 4.6% to reach ~$2,092. Closing it would mean that you secure a net profit of $92, reflecting the 4.6% increase in your position size. Thanks to the used leverage, this represents a 9.2% return on your initial capital of $1,000.

Crypto CFD Trading Strategies

The 24-hour nature and availability makes trading cryptocurrencies an attractive option among retail clients. Generally, crypto CFD traders opt for one of the three main strategies or trading styles:

• Day trading – Day trading is a popular crypto trading strategy. Day traders open and close positions within the same trading day, speculating on short-term price movements. Due to the volatile nature of cryptocurrencies, crypto day traders can generally find opportunities in one of the bigger and more liquid crypto CFDs. 

As a rule, crypto day traders analyze the market with technical indicators like vWAP, or use chart patterns like falling wedges, bull flags, dragonfly dojis, pin bars to help spot trends to make quick decisions. This strategy is suitable with 1m, 10m, and 15m timeframes, requiring constant monitoring of prices.

• Swing trading – this crypto trading strategy focuses on capitalizing on the price movement of a crypto asset over a period of a few days to several weeks. Traders look for price swings to enter long or short positions, depending on the general trend. Swing traders use technical indicators like stochastics, Relative Strength Index, or Exponential Moving Averages to help spot trends and opportunities. 

• Scalping – Scalping is a strategy where traders aim to profit from small price changes, entering and exiting trades within minutes or even seconds. As a rule, these traders use high leverage and short time frames, targeting small gains that add up over the trading day.

These trading styles can be accompanied by different strategies and techniques. For example, all styles of traders can use algorithmic trading bots to quickly execute trades when the proper conditions arise. 

Due to the volatility of the crypto market, traders like to implement breakout strategies to open positions in the direction of the breakout. Also, traders might have a long-term holding of crypto, then use crypto CFDs as a way to hedge and manage risk during bear markets. 

Advantages of Crypto CFDs

• Ability to go long and short – unlike buying crypto, CFD traders can capitalize on crypto price declines.
• Leverage – crypto CFD traders can augment potential gains with leverage.
• Volatility – the high volatility of crypto CFDs provides many trading opportunities.
• No need for digital wallets – traders shouldn’t worry about setting up digital wallets and moving crypto funds between multiple addresses.
• Low security threats – trading with reputable CFD brokers is often safer than holding your crypto funds with a crypto exchange. FTX was the second-largest crypto exchange by volume when it collapsed due to funds embezzlement.
• Regulated environment – reputable CFD brokers are regulated by financial watchdogs.
• Advanced terminals – CFD brokers offer advanced trading terminals like MT5, which offer many tools to customize the trading experience.

Disadvantages of Crypto CFDs

• Spread costs – CFD brokers charge commissions in the form of the spread, which is deducted right after opening a position.
• CFDs are illegal in some jurisdictions – some countries, such as the US, don’t allow CFD trading.
• Leverage is risky – crypto trading is inherently risky, and using leverage increases risks exponentially.
• Counterparty risk – although cryptocurrencies themselves are decentralized, trading crypto CFDs requires you to trust the broker.
• Overnight fees – some brokers charge a fee for holding a position overnight.

Crypto CFD vs Crypto Futures

Crypto futures are another popular way to invest in crypto assets without owning them. These derivatives are contracts to buy or sell crypto at a predetermined price for delivery at a specified time. With that said, most crypto futures deliver the USD value instead of digital crypto when the contract expires.

The main difference between CFDs and futures is that futures contracts have an expiry date that mandates the owner to settle at the predetermined price. If the price at the expiry date is higher, the contract owner secures a profit. CFDs don’t have any expiration time and can be held indefinitely.

Aside from this large difference, futures and CFDs are fairly similar. Once the contract closes both vehicles settle in cash placed in their account. As a result, delivery of crypto futures in the USD value mimics what a trader will receive when closing out the position.

Crypto Circuit Breaker System and Crypto Futures

The crypto circuit breaker system is a mechanism designed to temporarily halt trading during periods of extreme market volatility, providing a buffer against panic-induced selling or buying. Such systems, widely used in traditional financial markets, are now increasingly relevant in the cryptocurrency futures space due to the high volatility of digital assets.

How Crypto Futures Trading Can Be Halted

In cryptocurrency futures trading, circuit breakers are triggered when the price of a cryptocurrency experiences a sudden and extreme movement within a specified time frame. For example:

• Trigger Parameters: A circuit breaker may activate if the price of Bitcoin futures moves 10% or more in either direction within a 5-minute window.
• Time Frame: The duration of the halt varies, typically ranging from a few minutes to an hour, allowing market participants to assess the situation and adjust their strategies.

Purpose of Circuit Breakers

Circuit breakers are implemented to:

• Prevent massive sell-offs that can lead to flash crashes.
• Allow traders and systems time to process and adapt to sudden price shifts.
• Maintain market stability by curbing irrational trading behaviors.

Historical Activations in Crypto Futures

While traditional markets have witnessed circuit breaker activations during financial crises, instances in cryptocurrency futures trading are rarer due to the relatively recent adoption of such systems. For instance, during the dramatic Bitcoin price plunge in March 2020 (known as “Black Thursday”), some exchanges considered circuit breakers but relied instead on manual intervention. This highlighted the need for automated systems, prompting exchanges to introduce circuit breakers post-event.

Why the System is Vital

Cryptocurrency markets are highly speculative and influenced by:

• Macro-economic events, such as regulatory announcements or economic downturns.
• Technological factors, including blockchain upgrades or network disruptions.
• Market sentiment, often driven by social media and investor psychology.

In such an environment, circuit breakers act as a safety net, ensuring that market activities remain orderly and providing participants with the confidence to trade even amidst high volatility.

As cryptocurrency trading continues to grow, the circuit breaker system is likely to play an increasingly significant role, ensuring a balance between market dynamism and stability.

Sample Crypto Circuit Breaker Parameters

For example, the table below illustrates how a 10% price movement threshold might be applied across various cryptocurrency futures contracts:

Contracts	Reference Price	10% Price Limit
Bitcoin Futures (BTCZ4)	102435	10245.0
Micro Bitcoin Futures (MBTZ4)	102435	10245.0
Bitcoin Euro Futures (BTEZ4)	96820	9680.0
Ether Futures (ETHZ4)	409550	40950.0
Micro Ether Futures (METZ4)	409550	40950.0
Ether Euro Futures (ETEZ4)	387400	38750.0

Last Updated: 12/08/2024

Circuit breakers on cryptocurrency futures are rarely triggered, but they serve as an important safeguard. For instance, in volatile market conditions like those seen in March 2020, such mechanisms helped stabilize trading and prevent market panic. This system not only protects traders but also maintains the integrity of the market by ensuring orderly trading during sudden price shocks.

Crypto CFD vs. Crypto ETF

At the beginning of 2024, the US Securities and Exchange Commission (SEC) approved the first batch of Bitcoin spot exchange-traded funds (ETFs), which enables retail and institutional investors to gain exposure to Bitcoin via traditional stock markets. The combined value of these ETFs is about $58 billion as of mid-June 2024. At the beginning of 2024, the US Securities and Exchange Commission (SEC) approved the first batch of Bitcoin spot exchange-traded funds (ETFs), enabling retail and institutional investors to gain exposure to Bitcoin via traditional stock markets. The combined value of these ETFs reached approximately $58 billion as of mid-June 2024.

Shortly after, Ethereum spot ETFs were also approved, marking another milestone in bridging cryptocurrency and traditional finance. These ETFs provide investors with a regulated and accessible way to gain exposure to Ethereum’s price movements.

Source: The Block

Here are some differences between Bitcoin CFDs and Bitcoin ETFs:

• Bitcoin CFDs are derivatives, while Bitcoin ETFs are pools of funds used to buy, hold or sell Bitcoin.
• Crypto CFDs are offered by CFD brokers, while Bitcoin ETFs are listed on stock exchanges and available via brokerage firms.
• Unlike CFDs, Bitcoin spot ETFs are backed by physical Bitcoin that is held by issuers in secure wallets.
• Most crypto CFDs are not legal in the US, while Bitcoin ETFs are approved by the SEC.
• Short-selling Bitcoin ETFs is much more complicated than selling crypto CFDs.

How We Compare Against Other Crypto CFD Providers

At Alchemy Markets, we provide the best crypto CFD trading experience. Gain exposure to over 60 cryptocurrencies — one of the largest crypto CFD offerings in the industry.

Open long and short positions on BTC, ETH, ADA, DOGE, SOL, LTC, and other major assets to capitalize on price trends. Benefit from margin trading with up to 10:1 leverage, and enjoy some of the lowest trading costs in the industry with commissions as low as 0.25% round turn.

FAQs

What are the best timeframes to trade Crypto CFD?

Though cryptocurrencies can be traded 24/7, crypto CFDs are most liquid during the business week making Monday through Friday the best time to trade. The best chart timeframe for trading crypto CFDs depends on the user’s strategy. For example, scalpers operate with 1m and 5m charts, while swing traders would prefer 30m, 1H, and 1D charts.

How much capital do you need to trade Crypto CFD?

Most CFD brokers have minimum deposit requirements. You will find that Alchemy Market’s account minimum is $100. However, it’s recommended to start with a capital amount that aligns with your goals and risk tolerance.

What are the fees in Crypto CFD trading?

Most CFD brokers include commissions within their spread. Due to blockchain fees, Crypto CFD commissions are also passed along to you and can range from 0.25% to 0.40% depending on your account type.

Is it safe to invest in CFD Cryptocurrencies?

Investing in crypto CFDs involves significant risk, mainly due to market volatility and high leverage. While CFDs can generate substantial profits, they can also lead to large losses, sometimes exceeding the initial investment. Aside from the crypto price movement, you’ll also need to consider your broker’s reputation and compliance. Alchemy Market’s is a regulated broker and complies to the highest regulatory standards.