in Business, Tech ·
30-03-2021 11:43:00 · 1 Comments
If you are the one who likes to trade Bitcoin without actually using the digital currency itself, but with solely fiat means (conventional currency) instead, it’s quite easy and can be done through artificial instruments (derivatives) commonly known as Contracts for Difference (CFDs).
It is an important thing to remember that CFDs are usually traded over-the-counter. So these are not like government-regulated exchanges and are currently banned in the United States and Belgium. Having high regulation costs, many CFD brokerages do not choose this option in the United States.
Understanding a CFD and its advantages
So let us understand it in detail. CFD is just like a contract between a trader and a brokerage company. By this contract, the trader can take advantage of Bitcoin’s price movement without actually owning or buying the digital currency itself. By using these instruments traders can easily speculate and earn from the difference between their entry price and exit price levels.
They also do not need any knowledge of how to acquire and store Bitcoins securely. CFDs also benefit the traders from security concerns associated with bitcoinchampion features such as setting up and encrypting a wallet, downloading a back-up among others. This could be made clear by viewing a CFD as an agreement between the two parties, which is quite similar to a situation as if the trader is holding the actual asset (Bitcoin).
Another benefit of CFDs is their flexibility. It grants immense flexibility and convenience to the traders to open and close long (buy) and short (sell) positions in Bitcoin whenever they want – on any day, at any time within a day.
When we observe the fees associated with CFDs, it is relatively low, especially if compared to other more enlightened methods that allow you to participate in the market. But it is also true that CFD fees are a bit higher as compared to fees at other leading exchanges like Bitfinex, Bitstamp, Kraken, BTC-e and so on.
Disadvantages of CFDs
We can also find out some of the disadvantages which could be considered as bad aspects of CFD trading.
In the first point, we discuss the fee for premium services. If you have an active position overnight, an amount equal to 0.1% of your position size will be deducted daily from your account balance. We know that CFD trading is only possible through the use of leverage (which is a form of borrowing). So as long as you maintain your position, you will have to pay interest for the funding arrangement you have made. In other cases holding the actual
Bitcoins in your digital wallet would not charge you any fees or other costs.
Along with the daily premium fee on active trades, by the brokerage company you would be charged an additional fee every time you open a position. It is mostly named as a ”spread” and also defines the difference between the buy and the sell quotes, which the brokerage offers you.
We can understand it with an example. Let’s say the current spot price of Bitcoin is $14 555.60 per coin and you are wishing to buy Bitcoins at this price level. But here the brokerage company will not sell them to you at $14 555.60. It will give you a slightly higher quote, something like $14 575.60 per coin. And in case you wish to sell Bitcoins, here again, the brokerage will not buy them from you at $14 555.60, but at a slightly lower price, something like $14 535.60 per coin. So we can see a difference of $40 exists between the two quotes. This actually represents the spread. We can also say the difference between the price at which the brokerage company will buy from you and the price at which it will sell to you. In this way when the brokerage buys from you at a lower price and sells to you at a higher price, it generates a profit.
You should not ignore that these brokerage companies are very sharp. They keep an eye to protect themselves against unexpected and sudden moves in the prices of trading assets they offer their clients. When the market is going through volatility, intense trading and, an amount of leverage, any serious price move against a trader’s expectations could place their account balance deep into negative territory. If a considerable number of clients sail into negative territory and are unfortunately could not, the brokerage company could face bankruptcy.
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