CFD Crypto Trading
CFD crypto trading is an attractive method of speculating on digital currencies. Contracts for difference allow traders to bet on price changes without actually buying and selling popular tokens like Bitcoin. The best platforms also offer leveraged trading, meaning UK investors can increase their purchasing power in return for a small capital outlay, also known as margin.
This guide explains how trading cryptocurrencies with CFDs works. We also list the best online brokers and trading platforms in 2024.
Note, CFD crypto trading is currently restricted in the UK after the Financial Conduct Authority introduced a ban in January 2021. Retail traders will need to open an account with an offshore brokerage (read on for details).
Top Crypto CFD Brokers
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Pepperstone maintains its position as one of the fastest and most dependable CFD brokers during our latest round of testing. With execution speeds averaging around 30ms and an outstanding fill rate of 99.90%, the broker ensures a seamless trading experience without requotes or dealing desk interference. It also provides ample trading opportunities across over 1,300 assets.
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XTB offers a huge selection of more than 2,100 CFDs spanning forex, indices, commodities, stocks, ETFs, and cryptos (location-dependant). Leverage up to 1:30 is available in the EU and UK, while global clients and pro traders can access up to 1:500. XTB stands out for its CFD trading resources and tutorials to assist traders in developing short-term trading strategies.
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CMC lets you trade CFDs on 12,000+ assets across currencies, indices, commodities, shares, ETFs and treasuries. Spreads are relatively tight, there are no hidden fees and the industry-leading MetaTrader 4 platform is also supported for leveraged trading. Year after year, CMC shines as one of the best CFD brokers in the market.
CFD Crypto Trading Explained
CFD Basics
A contract for difference, or CFD, is a derivative contract between a trader and a broker. The agreement is that the trader or the broker must pay the difference between the underlying asset’s value at open and close.
If you predict that the price of a crypto, such as Ethereum (ETH), will increase, you would open a ‘long’ CFD contract. If your prediction is correct and at contract close Ethereum is worth more, the broker pays you the difference. However, if you are incorrect and the token has depreciated, then you must pay the broker the difference.
If you think that the value of a cryptocurrency will decline, you would open a ‘short’ CFD contract. A short contract is equivalent to selling an asset now and buying it again later at a lower price.
One of the key distinctions of trading cryptos with CFDs vs spot trading is the use of margin to boost your purchasing power and potential returns. Leverage allows you to multiply the total contract size without increasing your initial stake. For example, if you deposit £100 to a trading platform, then the maximum trade you can make without leverage is £100. If instead, you use leverage of 1:2, the total trade value doubles to £200, along with the potential profits (minus any fees).
Cryptocurrency Basics
A cryptocurrency is a digital currency that is not backed by a central government or bank. This is different from fiat currencies, such as the Pound sterling, which is regulated by the Bank of England. Cryptocurrencies use blockchain technology to maintain a public ledger of all transactions.
Cryptos are highly volatile assets, making them attractive for CFD trading. In the first six months of 2022 alone, Ethereum (ETH) fluctuated from £26,000 up to £36,200 and then down to £15,500.
You can also expect volatility over the course of a single trading day. On the 27th of June 2022, Ethereum was trading at just under £17,500 at 11 AM but by 3 PM it had dropped to just over £16,900.
Trade Example
To demonstrate how CFD crypto trading works, here is a straightforward example…
Ethereum Classic (ETC) is trading at £22. You open a long CFD contract worth £2,200, which is equivalent to 100 ETC. With leverage of 1:20, you only need to invest £110 (£2,200 / 20).
When the contract first opens, you will notice that you are making a loss. This is just the equivalent of the ETC buy-sell spread. For instance, if the buy-sell spread is £22 – £21.90, you will start out by making a loss of £10 (£0.1 spread X 100). To break even, ETC would need to increase in value by £0.1.
At contract close, ETC has increased in value such that the buy-sell spread is now £25.60 – £25.50 and 100 ETC is worth £2,550. After you return the £2,090 borrowed from the broker, your profit is £410 (minus any fees).
If you had instead placed a spot trade to purchase the token, you could have only bought a maximum of 5 ETC. After the increase in value, your 5 ETC would be worth £127.50, meaning a profit of only £17.50.
Benefits Of CFD Crypto Trading
- Potential for large profits with leverage
- 24/7 trading as crypto markets never close
- Avoids the requirement of purchasing a wallet to store crypto
Drawbacks Of CFD Crypto Trading
- Risk of significant losses due to leverage
- The volatile crypto market is difficult to predict
- UK traders must use unregulated or offshore brokers
How To Start Trading Cryptos With CFDs
Find A Trading Platform
The online broker and exchange that you choose for CFD crypto trading will have a big impact on your experience and success. Review the available options, weighing up the following factors:
Reliability
Because UK traders have to use unlicensed or offshore brokers, you need to be careful to avoid shady firms and scams. A good way to verify the trustworthiness of a broker is by reading customer reviews and ratings. Also check whether the platform is licensed by a reputable watchdog in another country, such as the Australian Securities & Investments Commission (ASIC).
Check out our list of recommended CFD crypto trading platforms here.
Fees
Broker charges will cut away at your profits so look for platforms with competitive commissions, transaction fees and spreads. Avoid brokers that are not transparent about their fee structure as you may incur hidden fees once you sign up and start trading.
Additionally, if you plan on executing CFD crypto trades that last longer than a day, check the costs for overnight financing.
Deposits & Withdrawals
The best brokers for CFD cryptocurrency investing will support several methods for making deposits to and withdrawals from your trading account. Almost all brokers will offer wire transfers but for instant deposits, you can use debit and credit cards or e-wallets such as PayPal and Neteller. In addition, many crypto exchanges support payments in Bitcoin.
Ensure that the broker you choose has reasonable minimum limits for deposits and withdrawals too. Shady websites may demand that clients generate revenue far greater than their initial deposits before permitting a withdrawal.
Customer Support
Look for brokers with accessible customer support teams. Any issues can halt your CFD crypto trading so you should aim to find a brand that is easily contactable. The top platforms offer support via social media, live chat or a phone hotline.
Reliable support teams are also available 24/7, given that crypto markets are open on weekends.
Develop A Strategy
Your CFD crypto trading strategy will be key to turning a profit. Trading with such high stakes is an emotional experience and it is easy to rush into a bad trade without thinking it through and damaging your portfolio. Adopting a strategy can help you to stay disciplined.
Consider the following tips when developing a trading system:
Indicators
When building your CFD crypto trading strategy, indicators can help you decide which tokens to trade on and when to enter and exit positions. Technical analysis can essentially inform trading decisions.
The indicators that you choose will impact the type of strategy you use. For example, if you are interested in betting against a trend’s continuation, you may want to use indicators such as pivot points. For a breakout strategy, look for momentum indicators such as the relative strength index or the exponential moving average. Cryptos are highly volatile assets. For this reason, you may also want a volatility indicator, such as Bollinger Bands.
Risk Management
As CFD cryptocurrency trading involves high risk through the inclusion of leverage, risk management measures should be incorporated into your strategy.
The top brokers permit traders to make use of stop loss and take profit orders. A stop loss order will automatically close a position at a predetermined price to prevent a losing contract from continuing. A take profit order will close a contract if a sufficient profit level is reached, helping to secure returns.
Demo Accounts
The best way to practise and build experience with trading CFDs on cryptos is with a demo account. These paper trading accounts use simulated funds so you can learn how a CFD trading platform works and test out different strategies.
Once you are confident then you can move onto a live account with real capital.
Bottom Line On CFD Crypto Trading
The popularity of trading cryptos has taken off in recent years with high volatility attracting many retail investors. The introduction of leveraged CFDs means trading digital currencies can be even more lucrative. With that said, it’s worth remembering that cryptocurrencies are notoriously volatile and many traders lose money.
Use our list of the best CFD crypto trading platforms in 2024 to get started.
FAQ
Is CFD Crypto Trading Legal In The UK?
Brokers licensed by UK regulators cannot offer cryptocurrency CFDs to retail traders. However, it is not illegal for investors in the UK to access CFD crypto trading via offshore or unregulated brokers. See our list of supporting brands.
What Is Crypto CFD Trading?
Crypto CFD trading involves entering an agreement with a broker where one of you must pay the difference of a token’s value between contract entry and exit positions. CFD trading often involves trading on margin to boost the total value of the contract.
Is Crypto Trading A CFD?
Not necessarily. The term ‘CFD’ simply refers to the type of trading instrument. CFD crypto trading means you are speculating on the price of a cryptocurrency. An alternative to crypto CFDs is spot trading crypto where you actually own the token and hold it until you sell it.
Is CFD Crypto Trading Profitable?
CFD crypto trading can be profitable. While it is a high-risk investment, there is potential for high rewards with the use of leverage. With that said, most retail investors lose money so a careful approach to risk management is needed.
Which Is The Best Crypto For CFD Trading?
There is no single cryptocurrency that is the best as each has its own advantages and disadvantages. While you may be dragged towards popular and well-known crypto such as Bitcoin and Ethereum, there are hundreds of emerging tokens that you can trade on. Tip: test out different tokens and strategies in a demo account before upgrading to a real-money account.