How to Trade CFDs on Cryptocurrencies – Complete Guide 2020
Reading time: 24 minutes
This article will provide traders with a guide to trading cryptocurrency CFDs. It will explore: significant cryptocurrencies (and not just Bitcoin), reasons why you should consider trading CFDs on cryptocurrencies, an explanation of how to purchase Bitcoin, Litecoin trading, Ethereum investing, and much more!
What is Cryptocurrency? - A Brief History
Cryptocurrency is a type of ''digital asset'' or ''digital currency''. It does not exist in the physical sense (as is the case with regular fiat currencies such as the Dollar and the Euro). Cryptocurrency not regulated or managed by any financial authorities or banks in the same way as traditional currency, but is mostly self-regulated, through the use of various encryption techniques. Furthermore, this process is powered via the internet, with users within associated networks providing the verification that enables the transactions to occur.
The genesis of what we now know as cryptocurrencies transpired back in 2009, and it all began with the launch of Bitcoin, the proto-cryptocurrency. Bitcoin was originally proposed as an electronic payment system based on cryptographic proof. The cryptographic proof came from the emerging technology of the blockchain — a kind of list of digital signatures that provide computational evidence describing the entire transaction history of each Bitcoin.
This public chain of ownership allows peer-to-peer transactions, without any need to entrust a third-party with the task of processing the payment. This lack of any kind of third party operating in a single, supervisory role means that Bitcoin is a decentralised digital currency. Back in 2009, some market commentators dismissed this new, virtual currency as a mere fad, a transitory reaction to the subprime crisis that had racked the global economy back in 2008.
But as Bitcoin has grown in value and credibility over the years, interest in this new type of currency – and the technology framework that underpins it – has blossomed. As more investors have embraced Bitcoin over the years, its value has been driven higher, which in turn has driven greater interest in this asset class. This has led to a breathtaking increase in value and volatility.
As a consequence of all of this, a large number of alternative digital currencies have arrived on the scene (and on some occasions have departed just as quickly), based on the innovation of the blockchain or such similar concepts. In early 2016, the combined value of all cryptocurrencies was estimated to be around $8 billion; by March 2017 this had ballooned to around $25 billion.
2017 proved to be a remarkable year for Bitcoin, and the cryptocurrency market in general. Having never been above $1,000 before 2013, Bitcoin broke above $6,000 in October of 2017 and by early December had rocketed above $10,000. By the end of that month, it set a record level of $19,783, climbing rapidly ahead of the launch of CME and CBOE futures contracts in the cryptocurrency.
The launch of these Bitcoin contracts on mainstream exchanges ushered in a new era, offering the first chance to trade cryptocurrencies on regulated platforms in the US — but it also generally coincided with a marked decline in the fortunes of Bitcoin.
Though volumes of the Bitcoin futures contracts grew steadily in the months after their launch — offering greater and greater and liquidity to traders — the price of Bitcoin fell into a persistent downtrend. By February of 2018, Bitcoin had plunged to below $6,500. By December 2018, that value had shrunk to below $3,500.
Also in December, the crypto market's market cap plummeted from just under $180 to $152 billion within a 24 hour period, with many spectators comparing the major crash to the infamous dot com crash of the early 2000s.
What Are the Other Significant Cryptocurrencies?
Bitcoin was by far the earliest cryptocurrency, arriving more than two years ahead of the second cryptocurrency, Namecoin. The success of Bitcoin has led to a massive proliferation in digital currencies in recent years, and today there are literally hundreds of cryptocurrencies in existence. One of the most interesting aspects of these new currencies is the lack of control by any single body. Traditional fiat currencies are governed by central banks that may operate independently of a national government, or at the behest of the government.
The FED (Federal Reserve) has the power to increase the supply of US Dollars, for example. The degree of decentralisation can vary from one cryptocurrency to another – as we shall see – but, in general, there is no central authority that plays an analogous role to a central bank with regards to cryptocurrencies. We're now going to take a look at four of the other major cryptocurrencies available.
Ethereum (or Ether), is the largest rival to Bitcoin, based on percentage share of total cryptocurrency market capitalisation. Other significant players in the field include Bitcoin Cash, Litecoin, and Ripple, to name a few. Cryptocurrencies are quoted against the US Dollar (USD) and the Euro (EUR) - two of the world's most widely-used currencies.
The following list shows you the codes used to represent these major cryptocurrencies against the US Dollar:
- Bitcoin against the Dollar - Code: BTC/USD
- Ether against the Dollar - Code: ETH/USD
- Bitcoin Cash against the Dollar - Code: BCH/USD
- Litecoin against the Dollar - Code: LTC/USD
- Ripple against the Dollar - Code: XRP/USD
Similarly, the list below shows the codes for the major cryptocurrencies against the euro:
- Bitcoin against the Euro - Code: BTC/EUR
- Ether against the Euro - Code: ETH/EUR
- Bitcoin Cash against the Euro - Code: BCH/EUR
- Litecoin against the Euro - Code: LTC/EUR
- Ripple against the Euro - Code: XRP/EUR
Why Trade CFDs on Cryptocurrencies?
Cryptocurrencies are made possible via the emerging technology of the blockchain - the public ledger that keeps a record of all transactions (or similar consensus ledger systems). Since the outset, the potential of both this new type of asset and the technology in general, has engendered interest in specialist quarters.
In recent years, cryptocurrencies have begun to attract attention from a much wider audience, as Bitcoin has been accepted as a means of payment in increasingly more places. Cryptocurrencies have also begun to generate a lot of interest as an alternative investment. A large part of this is down to headlines generated by the huge leaps in Bitcoin's value. The price of Bitcoin began in 2017 with a worth of around $1,000, rocketing to more than $19,000 by December of that same year.
This new asset space gained further credibility when established exchanges like the CBOE and CME launched futures contracts in Bitcoin. Many people gain an exposure to cryptocurrencies by simply putting money into them – that is, buying the actual digital currency. There are downsides to this, however. Processing times for buying a cryptocurrency are slower than the instant fills that typify a regular Forex (FX) trade; they are unregulated; and there have been some scare stories of compromised Bitcoin and Ethereum wallets.
You can easily sidestep all these concerns by trading cryptocurrencies via CFDs. Using CFDs allows very fast transaction times, which is useful for such a volatile market. For instance, Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA), so that Bitcoin CFD trading with this broker is regulated in the same manner as normal FX trading.
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How to trade Bitcoin CFDs
Bitcoin is the eldest child in the cryptocurrency family. Dating back to 2009, this makes it substantially older and more established than its nearest cryptocurrency rival in terms of capitalisation. Because it is the most mature cryptocurrency, it shouldn't come as much of a surprise that it generates the most headlines. In 2017, those headlines were plentiful, on account of Bitcoin's remarkable growth in value. You can track Bitcoin's 2017 gains in the chart below:
Source: MetaTrader 4 platform - BTC/USD daily chart - Data Range: 11 Apr, 2017 - 7 Dec, 2017
One way to profit from such increases in value is to actually purchase Bitcoin and store it in a Bitcoin wallet, with the aim being to sell it later at a higher price. A much simpler way to speculate on the value of Bitcoin is to trade BTC/USD using CFDs. All that's required then is to open a live trading account, and you can then readily trade BTC/USD from a chart using a trading platform such as MetaTrader 4 (MT4) or MetaTrader 5 (MT5)
It's worth stressing how volatile Bitcoin can be. Valuations in early 2018 pulled back substantially from the highs seen at the end of 2017, and this correction has been accompanied by some wild swings in price. Some traders might approach such volatility with caution, while others might interpret it as a trading opportunity, and others might see potential in shorting the price and looking for further falls. The choice, of course, is yours.
Learn to Become a Bitcoin Cash CFD Trader
Bitcoin Cash is what is known as an altcoin — a virtual currency that works fundamentally in the same manner as Bitcoin. In fact, Bitcoin Cash is simply an offshoot of Bitcoin, resulting from a hard fork in the blockchain. A hard fork is effectively a divergence in the transaction record into two separate and incompatible chains, each governed by a different set of rules. The hard fork in Bitcoin that created Bitcoin Cash arose from a bottleneck within the Bitcoin network, caused by the size of the blocks.
This constraint on capacity created a problem of higher fees and delays in transactions, and led to a section of the Bitcoin community seeking to increase the size of each block in order to ameliorate this scalability problem. Another section of the community wanted to keep things as they were, and in August 2017, the blockchain split. Bitcoin Cash adopted larger blocks in a new branch of the blockchain, and mainline Bitcoin continued with the original chain.
The clash is as much an ideological one as it is a technical one, with issues of decentralisation and security at the core of the argument. To keep tabs on how the price of Bitcoin Cash has changed over time, people trading with Admiral Markets simply need to follow these easy steps:
- Login to their MT4 or MT5 trading platform with their Admiral Markets trading account
- Right-click on the 'Symbols' window
- Select 'Show All'
- Search for BCH/USD in the list
- Right-click on this and select 'Chart Window'
Source: MetaTrader 4 - BCH/USD Daily Chart - Data Range: 26 Dec, 2017 - 7 Feb, 2018
Now that you understand the process of purchasing crypto CFDs, you might want to know the history of some leading coins. Litecoin began in 2011, when it was created by Charles Lee, whilst he was still an a employee at Google. Litecoin was, for a while, the second-largest cryptocurrency, gaining a reputation as being the silver to Bitcoin's gold. It has in recent years been eclipsed by other newer cryptocurrencies though. Litecoin's core aim was to provide an alternative to fiat currency for payment.
Though Litecoin is technically very similar to Bitcoin, it does offer faster transaction times and lower transaction fees, meaning that it is more suitable for smaller transactions. At the time of writing, Litecoin is the sixth-largest cryptocurrency in terms of market capitalisation. Aliant Payment Systems, a US-based payment services merchant, announced in February 2018 that they were adding Litecoin to their range of services, alongside Ethereum and Bitcoin.
What is Ethereum? Ethereum (also interchangeably referred to as Ethereum and ETH) is a decentralised, blockchain-based computing platform. Which is to say, where Bitcoin is a currency pure and simple, Ethereum is a whole lot more. It takes the technology at the heart of Bitcoin – the tamper-proof public ledger known as a blockchain, and run by a network of nodes – and uses it as the infrastructure for a system that proposes to turn the way the cloud works on its head.
Rather than apps, payment services, and cloud storage being operated by single parties, Ethereum proposes a network wherein no single entity governs these processes. To use this network, you need Ether. Ether is a cryptocurrency that allows you to pay for transactions and services within the Ethereum network. You can therefore think of Ether as being the fuel that powers the platform.
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Ethereum vs Bitcoin
Ethereum offers substantially faster transaction times compared to Bitcoin, owing to its shorter block time – which is the mean amount of time for the network to generate another block within the blockchain. This also means lower transaction fees compared with Bitcoin.
Perhaps most interesting of all is that Ethereum offers smart contract functionality – a new technology that has been opened up by blockchains. Basically, a smart contract enforces the terms of a relationship with cryptographic code. Ethereum has quickly grown in popularity, and is currently the second-largest cryptocurrency by market capitalisation ($17 billion at the time of writing).
Ripple and XRP
What is Ripple? Ripple (sometimes also called Ripples or XRP) is a payment protocol that enables peer-to-peer money transfer. Like Bitcoin, it uses a public ledger for security that is constantly validated by a network of independent servers. Ripple is also the name of the company that runs the protocol, headquartered in San Francisco. Ripple is also used interchangeably for the native digital currency of the protocol.
The Ripple system was conceived as having a wider scope than Bitcoin, purporting to allow fast, secure financial transactions of pretty much any type. It doesn't just support XRP, but all currencies in fact. Ripples are the tokens that support the payment system, and they are the third-largest cryptocurrency by market capitalisation (at the time of writing).
Users need to have a small reserve amount of XRP on their account to act as an obstacle for hackers attempting to flood the network with fake accounts. For similar reasons, each transaction incurs a tiny XRP charge to preclude a flood of fake transactions. Ripple does not use mining like Bitcoin to create new tokens (see the mining section below for more information).
Instead, the founders created 100 billion XRP at the beginning and stated that no more would be created, based on the rules of the protocol. Somewhat controversially, a large chunk of that XRP remains in the hands of the founders. There are questions of how decentralised the protocol actually is, but at the same time, this cryptocurrency and payment system has garnered attention from mainstream financial institutions in a way that has eluded other rival virtual currencies.
How Does Mining Fit into All of This?
If you have a passing familiarity with either Bitcoin or cryptocurrencies in general, you have likely come across the concept of 'mining a digital currency'. In this context, what is mining exactly? To answer that question, we need to examine the creation of cryptocurrency. The terminology originated from Bitcoin and stems from the fixed number of Bitcoins that will ultimately exist (21 million) according to the Bitcoin protocol. Only a certain number of these have been 'unearthed' so to speak. Mining involves unearthing new cryptocurrencies, and this actually happens as a reward.
This 'reward' is an economic incentive given to a miner for the work completed in terms of creating new blocks of validated transactions, and therefore contributing to the upkeep of the network. It was also designed as an initial mechanism for distributing coins in the intentional absence of a central authority.
Cryptocurrencies rely on nodes. These are computers or servers that work together to exchange transactional information around the network. A mining node is effectively trying to win a race to solve a computational puzzle — an exhaustive search of possible inputs that when combined with data in the current block and passed through a cryptographic hash function, will give an acceptable solution.
The first node to do this 'wins' the race and adds a new block to the blockchain. This provides a new hash for the next block that defines the upcoming puzzle to be solved. The reward is a certain number of the cryptocurrency in question. For Bitcoin, this is currently 12.5 Bitcoin (at the time of writing). Solving the puzzle is made intentionally difficult to prevent someone going back to alter information in older blocks.
Modifying a past block in this way would also require you to redo the puzzle solving for all the newer blocks chained after it. The difficulty involved makes it extremely unlikely that such an attacker could keep up with the addition of new blocks by honest nodes. Boiling it all down to the nuts and bolts, the process was designed to issue a steady stream of Bitcoin, while also maintaining the credibility and security of the transactional history – without relying on oversight from some central authority.
The original Bitcoin proposal by Satoshi Nakamoto actually introduced the mining term, stating that: ''the steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation''.
Trading CFDs on Cryptocurrencies
Is the mining of Bitcoin profitable? Or should you instead mine Ripple or another cryptocurrency?
The short answer is: it's not profitable for most people anymore. The Bitcoin protocol aims to yield a steady flow of tokens (one every ten minutes). It follows that the more people mining, the greater the difficulty of success. So back in the early days of Bitcoin, it would have been possible for an individual to profitably mine Bitcoin.
The competition now is so fierce though that extremely powerful, dedicated computer hardware is a necessity, running 24 hours a day. As you can imagine, this comes with an attendant cost in electricity that is substantial. Rather than mining as individuals, people pool their resources to set up 'mining farms'. These are data centres running thousand of machines, located in areas with low electricity costs.
As an individual, it is actually much more convenient to trade the valuation of a cryptocurrency by using CFDs. Trading CFDs offers a quick, simple, and versatile way to speculate on the price of a variety of major cryptocurrencies. Now that you're up to speed with the big names, let's move on to actually getting started with trading cryptocurrencies.
How to Connect to a Cryptocurrency CFD Trading Account in MT4 or MT5
- Open a Live Trading Account
- Download MT4 or MT5 to use as your cryptocurrency trading platform
- Open the platform and click on the 'File' tab at the top left of the screen
- Select 'Login to Trade Account' and enter your trading account details
- Open the cryptocurrency CFD chart of your choice
- Click 'New Order' when you want to buy or sell
You can read more about opening an account and logging in to MetaTrader with article on How to Open a MetaTrader 4 Account.
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Where Do I Find Cryptocurrency CFDs in the MetaTrader 4 Trading Platform?
If you can't see the cryptocurrencies you want immediately in MetaTrader, just go to the MarketWatch window on the left-hand side of the platform. In that window, you should see a list of market symbols. This may not be an exhaustive list of all the markets that are available for you to trade with Admiral Markets, however. To see this list, just right-click in the 'MarketWatch' window and select 'Show All'. You should now see cryptocurrency CFDs in the list of prices, as shown in the image below:
Source: MetaTrader 4 - BTC/USD hourly chart - Market Watch - Date Accessed: 8 February 2018
To launch a cryptocurrency chart, just click on the symbol and drag into the chart window on the right. Alternatively, right-click on the cryptocurrency of your choice and select 'Chart Window'.
How to Open and Close a Position in the Ethereum Cryptocurrency CFDs
Placing an order on a cryptocurrency is very easy with MetaTrader 4. Let's run through an example of how to open a cryptocurrency position using Ethereum. For this example, we used an enhanced version of MT4 by downloading and installing the MetaTrader 4 Supreme Edition (MT4SE) plugin. The MT4SE plugin is free to download, and gives your platform a big boost in terms of the available number of indicators and expert advisors.
Cryptocurrency Invest Example: Opening an ETH/USD Position
For this we used the Mini Terminal EA. Once you have installed MT4SE, you should see this listed as 'Admiral – Mini Terminal' in the list of expert advisors within your 'Navigator', as shown in the image below:
Source: MetaTrader 4 platform with the Supreme Edition plugin installed - A Mini-Terminal order ticket for ETH/USD - Date Accessed: 8 February 2018
First we opened a chart for the ETH/USD, and then double clicked on Admiral – Mini Terminal to launch the EA. As you can see, this gives you a small order ticket. We then chose '1 lot' as the order size, and then by pressing 'CTRL' and then clicking in the S/L field (that is, the stop-loss field), we then opened up the S/L calculation dialogue box that you can see below the mini terminal in the image above.
This function allows you to specify the amount of risk you want to take on board with this this crypto position. You can define this as either as a flat amount in your account's base currency, or as a percentage of your account's free equity. The mini-terminal will then calculate the stop level for you that best matches your specified amount of risk.
Then, it's as simple as clicking 'Sell or Buy' to take a position in your chosen cryptocurrency CFD. Optionally, you can also set a take profit level and/or a trailing stop. So, once you have taken a position in the cryptocurrency of your choice, how do you then go about closing the position? There's more than one way to go about this. Let's first look at closing just part of the position:
Example: Partial Closing of a ETH/USD Position
Sometimes, it can be beneficial to reduce your exposure by closing off a portion of your open position. You might, for example, want to realise some profit on a winning position, or perhaps lighten your size on a losing trade. Either way, by partially closing, you retain some exposure to future price moves. When you have opened a position you will see lines marked on the relevant cryptocurrency chart that represent your trade, and any associated stop-loss or take profit orders.
Source: MetaTrader 4 - Price data from Admiral Markets - ETH/USD hourly chart - Date Accessed: 9 February 2018.
In this example, a 'Buy' trade was placed, and our position is shown with a green box. Had we chosen to sell, this would be a red box instead. Clicking in this box opens a web dialogue window which offers you a variety of options, such as to amend any stop-loss or take profit orders you may have. We clicked on 'Partial Close', and you can see in the image above the dialogue that this option presents. We entered 0.5 into the Volume field, which would allow you to close off half of the 1 lot open position.
Example: Total Closure of ETH/USD Position
Closing your whole position is no more complicated than making a partial closure. All you have to do is make sure that your trading size is the same as the open position, and then deal in the opposite direction. We originally bought 1 lot of the ETH/USD to open the position. To close this, we would need to sell 1 lot of the ETH/USD. Just as in the example above, traders could click on the green box that represents their open position and this time, just click on the red 'Close Order' button, without first clicking 'Partial Close'.
Source: MetaTrader 4 - Price data from Admiral Markets - ETH/USD hourly chart - Date Accessed: 9 February 2018.
An Easy Way to Get Started
So, now you've read about the different cryptocurrencies available to traders and how to trade them with CFDs, how do you take your first steps into the world of cryptocurrency trading? One smart way is to do so via a risk-free demo trading account. This allows you to explore the functionality of your chosen trading platform, and place orders on live cryptocurrency CFD prices, but without risking any money, until you feel confident enough to open a real position with a live trading account.
Trade Cryptocurrency CFDs With Admiral Markets
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.