Crypto CFDs – A Growing Trend for Traders
Contracts for Difference (CFDs), a popular derivative instrument developed in the early 1990s, saw a huge spike in popularity in 2020. The pandemic led to the rise of a generation of “home-based” day traders, who found attractive opportunities to trade during the surging market volatility. The fear of rising inflation, coupled with the weakening US dollar and increased institutional adoption of cryptocurrencies, encouraged people to explore the digital asset class by entering the world of trading.
2020 Belonged to Cryptocurrencies
2017 had set the stage for cryptocurrencies gaining mainstream attention. In 2020, the digital asset class broke all records. Bitcoin gained over 200%, crossing above $23,000 in December 2020. The move reminded traders of BTC’s frenzied rally in 2017, but more was yet to come. Starting 2021, the digital currency achieved new heights, reaching $58,330 on February 21, 2021, as heavyweight institutions embraced it wholeheartedly. The world’s second largest cryptocurrency, Ethereum also flirted with new highs on February 20, at $2,018, with wide scale institutional adoption. Ethereum rose from its lows of 2018 to trade around $750 at the end of 2020, fuelled by the rise of DeFi applications being built on top of its network.
The global pandemic and ensuing lockdowns severely battered economies worldwide. Markets crashed in February-March 2020, triggered by widespread panic. The supporting measures taken by governments and central banks sparked concerns about a rise in inflation. Eroding dollar value of traditional assets provided a conducive environment for cryptocurrencies to thrive. Not just individual traders, but institutional investors also increasingly included cryptos in their portfolios.
Big names like JP Morgan, PayPal, Tesla and Mastercard announced their intent to include cryptocurrencies as payment modes for transactions. This further propelled crypto value as a mainstream asset.
Asia has truly dominated the landscape of crypto innovation, trade and adoption. According to the 2020 Geography of Cryptocurrency Report by Chainanalysis, a total of $107 billion worth of cryptocurrency transactions was recorded in East Asia, from mid-2019 to mid-2020. This was 77% more than that in Europe. China alone accounts for 65% of the global hash power, according to the University of Cambridge.
In 2020, Southeast Asian nations accelerated their adoption of crypto. In the Statista Global Consumer Survey, the second and third highest rate of cryptocurrency usage was recorded in Vietnam and the Philippines, respectively. Over 21% of Vietnamese and 20% Filipinos had used cryptos for remittances. The Philippines has one of the largest populations of foreign workers. In May 2020, the Vietnamese government set up a crypto research group to evaluate policy proposals regarding digital assets. This is a big move, considering that the country had banned cryptos in 2018.
Asia plays a huge role in the cryptocurrency markets due to many factors. These include a huge population base, which favours e-payments in everyday life, from making flight bookings to paying rent. The culture of thriving in a digital ecosystem is prevalent here, which creates greater opportunities for widespread adoption of cryptocurrencies. This is why big investment banks like the Malaysian Kenanga are investing in local crypto exchanges.
Kenanga Investment Bank recently bought a stake in Tokenize Xchange, to offer its customers a wide spectrum of financial assets and services. Singapore and Hong Kong have deep pools of liquidity as well as a sound regulatory structure. Singapore, for instance, is known for its crypto-specific regulations via measures like AML/KYC and FATF Travel Rule Compliance.
With a surge in retail interest in cryptos, CFDs have become a popular means to participate in this market. Traders can speculate crypto prices, without the need to directly own them. Retail traders can also participate with much smaller initial capital than they would need to trade directly on exchanges. Given these factors, the popularity of this derivative instrument is poised to grow in 2021 as well. Here are some other reasons that will drive this growth.
With leverage, traders need to fund only a small portion of the trading position, while the broker lends the remaining amount. This depends on the leverage ratio offered by the broker, which differs according to regulatory laws across jurisdictions. For instance, gt.io, the world’s first hybrid broker, offers leverage on crypto CFDs of up to 1:500.
This increases the trader’s market exposure and thereby the profit potential. However, leverage can also magnify losses, if the market moves unfavourably for the trader. Proper use of risk management tools is essential.
Volatility Brings Trading Opportunities
A key trait of the cryptocurrency market is high volatility. The pandemic and resultant uncertainty made this volatility even more pronounced. Also, every new development in the crypto and blockchain landscape impacts prices. For instance, Tesla’s investment of $1.5 billion in Bitcoin sent BTC soaring 16% to trade above $44,000 on February 8, 2021.
Ethereum price also hit new highs at $1,567.7 in early February 2021, ahead of the launch of Ethereum futures on the Chicago Mercantile Exchange (CME). Similarly, when Ripple faced a lawsuit from the US SEC in December 2020, a decision to suspend any additional sales of XRP was made by the company. As a result, the coin’s price declined almost 51% on February 5, 2021 to $0.37.
CFDs are useful for trading the crypto market volatility, since they allow traders to take positions in both rising and falling markets. Traders can enter positions and exchange the price difference of the underlying asset between the opening and closing dates of the contract. These contracts do not have expiry dates, providing traders with more flexibility to enter and exit positions whenever they wish to, based on their analysis. This provides more opportunities to trade cryptocurrencies than trading directly on exchanges.
Trading with Convenience and Flexibility
Traders of all styles, experience levels and risk appetites can start trading CFDs. They can start with much smaller initial capital outlay than would be required on exchanges, which is a great solution for beginners. Moreover, brokers like gt.io allow traders to make deposits in cryptocurrencies, which means further ease of funding trading accounts. They don’t have to convert cryptos into fiat or vice versa for deposits and withdrawal.
Hedging portfolios with CFDs can be a great strategy to tackle market downturns. Derivatives provides a trading environment that closely mimics the underlying market. Cryptocurrencies are not regulated by central banks. Bitcoin, for example, due to its finite supply and decentralised nature, provides an insurance against the devaluation of major global currencies. Therefore, Bitcoin CFDs can be considered as a hedge against inflation risk.
Not just cryptos, traders can also delve into multiple assets like currencies, commodities, stocks and indices, all from a single platform with CFDs. This offers greater opportunities to diversify their portfolio. With no fixed contract size, traders can alter position sizes and leverage, according to their risk appetite and long-term goals.
Risk Management with Robust Trading Platforms
A reliable and feature-rich platform like MetaTrader 5 offers enhanced CFD trading experiences in the cryptocurrency markets. With the help of comprehensive technical analysis tools, traders can make informed predictions regarding price trends. Many types of orders, execution modes, indicator types, access to market news, reports and features for back-testing trading strategies, lead to greater confident in decision making. This includes robust tools for limiting losses, like stop-loss and take-profit.
“Continued quantitative easing, particularly in the US and Europe, has set the stage for the digital asset class. This is likely to direct institutional interest towards cryptos. Further, the demand for contact-less finance and the limitless opportunities offered by blockchain, across industry verticals, will propel crypto value higher. Our aim, at gt.io, is to offer traders robust tools to make the most of the trading opportunities that arise, while managing risk effectively,” stated Constantinos Pavlides, Director of Marketing, gt.io.
Unique Trading Opportunities for Traders
Synthetic pairs offer interesting opportunities for crypto traders, where they can get the best of both worlds, fiat and crypto. gt.io offers synthetic crypto hybrid pairs, such as BTC/Nasdaq, BTC/Apple, BTC/ZAR and BTC/Twitter. This opens up exciting opportunities to trade crypto assets against the ups and downs of stock indices and equities.
Partnering with a Hybrid Broker
By adding a hybrid broker to their broker portfolio, partners can benefit from a mutually rewarding relationship. This includes not only an opportunity to offer their clients crypto CFDs, but more innovative trading instruments like synthetic crypto pairs. Additionally, they can receive commissions in crypto or fiat, and offer the same advantage to their customers. By allowing traders to deposit and withdraw in crypto, they get a competitive advantage in terms of client acquisition and retention.
The importance of timely information and education has been rising, with the entry of new traders in the cryptocurrency markets. Introducing brokers and affiliates have a huge advantage as a result. They can offer traders robust educational resources, like tutorials, analysis reports, trading guides, regular news updates and more to help them make informed decisions.
Through partner programs, brokers can provide the necessary support to affiliates and IBs, equipping them with the right tools for client onboarding and satisfaction.
Our traders and partners are our top priority. We continuously strive to find new ways in which we can enhance their trading experience and provide them with a favourable trading environment. At the core of our company, lies a strong affiliation for digital transformation and widespread adoption of cryptocurrencies. We truly believe that it can redefine global finance. That is why we are better every day, offering you more than what is out there.