CFDs or contracts for difference, are a financial derivative, which allows the investment to be made on the price of the underlying asset, in this case on the cryptocurrency, without the need to own it. It is a “high risk” leverage product that could result in loss of principal. It is important to note that CFD traders do not own or have any rights to the underlying assets. For a better understanding of the subject, it is necessary to know the use of cryptocurrencies.
Use of cryptocurrencies
Cryptocurrencies are virtual currencies that use a decentralized network (blockchain) in order to carry out financial transactions safely. You can make a transfer of a cryptocurrency to someone over the Internet without the need for intermediaries, such as a bank, for example. Bitcoin and Ethereum are currently the best-known cryptocurrencies on the market, however, new cryptocurrencies are being created every day, which have different levels of reliability and transparency.
How to trade CFDs?
When trading CFDs, a position is assumed in the future direction in which the price of such an asset will be managed. If it is thought that the price of the underlying asset will move upwards, a long position will be opened in the purchase of CFDs and would obtain a profit that will be proportional to the appreciation of the price of the asset, from the moment the CFD is purchased until the moment the transaction is closed.
If, on the contrary, it is thought that the price of the asset will move with a downward trend, then a short position will be opened by selling CFDs and a profit proportional to the depreciation of the asset price would be obtained. Also, if the price moves against the position taken, a loss would be obtained in the same way that will be proportional to the variation in the price of the asset. The advantage of CFDs will be directly related to the variations that occur in the market with the advantage that they do not represent direct losses on their own assets in the event that these occur.
Disadvantages of CFDs
The big problem with CFDs is that many experts consider them as “artificial” assets based on speculation and that they do not represent a real asset, but are a “derivative” of it, and can cause major economic problems in their environment, not because Barren Buffett called them “weapons of mass destruction.” We must take into account that CFDs have caused many economic crises in the past in the current monetary system (based on FIAT money) as happened in the collapse of subprime mortgages and that gave rise to the great American crisis of 2008, the problem is that now this practice is being carried out in the world of cryptocurrencies, which is a source of concern on the part of people in the sector, which seeks to make the cryptocurrency environment more decentralized and transparent than the FIAT environment.
What do you think about this topic? Have you heard about cryptocurrency CFDs?
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