How do cryptocurrency CFDs work?

When trading cryptocurrency CFDs, traders are not buying or selling actual cryptocurrencies. Instead, they are entering into a contract with a broker based on the price of the cryptocurrency.

CFDs simulate trading their underlying asset — in other words, traders simply buy and sell CFDs as if they were trading the underlying asset. For example, if a trader wanted to buy the equivalent of 100 ETH, they would buy a 100 ETH CFD, which allows traders to use leverage and go long or short depending on which direction they think the price will go (we’ll explain the concepts of leverage, long and short below).

Here’s how it works:

Choose a cryptocurrency to trade, such as Bitcoin or Ethereum.

Decide whether the price will go up (“long”) or down (“short”).

Decide whether to use leverage and how much.

Open a position by entering into a CFD with a broker.

If the prediction is correct, the trader makes a profit. If the prediction is wrong, they lose money.

A key feature of CFDs to be aware of is leverage. This allows traders to open larger positions with less capital. While this can magnify potential profits, it also increases the risk of losing, including the trader’s entire investment. For beginners, it is crucial to understand and carefully manage this risk, so let’s take a deeper look at how margin trading works.