An in-depth look at the rise of crypto CFDs
Although Contracts for Difference (CFDs) have been around since the early 1990s, the derivative instrument saw a huge surge in popularity in 2020. The pandemic-induced market volatility is possibly the key reason for this rise in popularity. Prolonged stay-at-home restrictions also offered the perfect opportunity for people to explore cryptocurrencies and enter the world of trading.
Cryptocurrencies Rising
If 2017 was a record year for cryptocurrencies, 2020 was a record-breaking year. The most popular cryptos, especially Bitcoin, touched new highs through the latter part of the year. Although not without volatility, even Ethereum rose from its low of $91, witnessed in December 2018, to crossing the $450 mark by the end of 2020.
The global pandemic left economies across the world battered, delivering a big blow to traditional assets. The market sentiment of fear that surrounded mainstream assets offered a conducive environment for cryptocurrencies to thrive. Not just individual traders, but companies and institutional traders turned to the digital asset class. This further fuelled the rise of cryptos, on hopes of digital currencies becoming mainstream.
From JPMorgan to Visa and PayPal, some of the largest names in the financial sector announced their adoption of cryptocurrencies for transactions. This proved to be a big confidence booster for individual investors.
However, nowhere has cryptocurrency adoption been as pronounced as in the African continent. The continent has witnessed increasing crypto ownership, trade volumes, and, consequently, regulation. According to a report by Chainalysis, Africa ranks second in terms of peer-to-peer crypto trading. As of September 2020, Nigeria leads in terms of growing P2P volumes, which were recorded between $5 million to $10 million weekly. Kenya and South Africa come in at a close tied second place, averaging weekly trade volumes of $1 million to $2 million.
Another report by Arcane Research, in partnership with Luno, revealed that Nigeria, Uganda, South Africa, Kenya and Ghana are among the top 10 nations on Google in term of search related to Bitcoin. Africa is shaping up to be one of the most promising regions for the adoption of cryptocurrencies.
Along with the rising interest in cryptos among retail traders, CFDs have emerged as a viable means to trade this digital asset class. Traders do not need to own the underlying asset to be able to speculate on its price, which means that they can trade digital currencies with much smaller capital than trading directly on exchanges. This is only one of the reasons for the growing popularity of crypto CFDs. The derivative instrument is likely to continue to grow in popularity among crypto traders in 2021. Here are some of the key reasons why.
Leverage
With leverage, the trader only needs to fund a fraction of the trading capital, while the broker lends the remaining amount. The amount to be funded by the trader is based on the leverage ratio being offered by the broker. Leverage levels differs between brokers. For example, with gt.io, the world's first regulated hybrid broker, traders can access leverage of up to 1:500 on cryptocurrency CFDs. So, with only a fraction of the costs being funded by the trader, they can open positions that are much larger than that afforded by only the capital in their trading account.
Leverage can be tempting, since it increases exposure, which in turn magnifies the profit potential. On the other hand, larger exposure also multiplies potential losses, if the market moves against the trader's price prediction. This is because the profit or loss is based on the total position size, rather than the amount funded by the trader.
Greater Trading Opportunities
The cryptocurrency market is characterised by immense volatility. This volatility becomes even more pronounced during uncertain times as seen with the Covid-19 pandemic. Add to that that every bit of crypto news can impact the market. Positive news, like Bitcoin crossing the $40K mark on January 8, 2021, was a reason to celebrate for crypto enthusiasts. The positive market sentiment rippled across the market. Similarly, when Ripple faced legal hurdles from the SEC, towards the end of December 2020, it dampened market sentiment.
CFDs prove to be useful means to trade the volatile crypto market, since they offer traders the ability to speculate on both rising and falling prices. With CFDs, the trader enters into a contract to exchange the difference in price from the time the contract is opened till the time the contract is closed. So, traders can choose to take a long position in bull markets and a short position in bear markets. This means that CFDs offers more trading opportunities than trading directly on exchanges.
Convenience
CFDs are suited to all experience levels, trading styles and risk appetites. With derivative instruments, traders can choose to trade with much smaller capital than they would need to if they directly traded cryptos on exchanges. This is useful for beginners, who tend to prefer to start out small and gradually increase position sizes as they gain experience. In addition, brokers like gt.io also allow traders to make deposits in cryptocurrencies, which means that there is no need to exchange cryptocurrencies for fiat currencies in order to deposit funds in their trading account.
CFDs also offer a trading environment that closely mimics the underlying market. This instrument also offers a great way to hedge a trading portfolio. Unlike other types of derivative instruments, CFDs do not have an expiry date. This means that traders can choose to close a position whenever they wish, based on their expectations of market movements.
Crypto CFDs are even more convenient as they allow traders to trade multiple assets, all from a single account. Also, with no fixed contract size, traders can choose their position size, based on their risk appetite, level of leverage and trading goals.
Risk Management
Ensuring robust risk management is also convenient with CFDs. Traders can easily place their stop loss and take profit orders before entering into a contract. In addition, with regular account reports, they can make informed decisions on their open positions. By evaluating their risk appetite, traders can also choose their leverage ratio, rather than being restricted by the asset price for entering a position.
"This is an exciting time for cryptocurrencies. With rising institutional interest and even central banks considering their own Central Bank Digital Currencies, the future appears promising for the digital asset class. But making the most of trading digital assets requires sound knowledge of the market, one's own risk appetite, a robust trading strategy and the use strong risk management tools," stated Constantinos Pavlides, Director of Marketing, gt.io.
A Unique Opportunity
An interesting development in trading cryptocurrencies is the availability of synthetic pairs. For instance, gt.io has created carefully curated synthetic crypto hybrid pairs to offer exciting trading opportunities. Some of these pairs are BTC/Nasdaq, BTC/Dow Jones, BTC/Apple, BTC/Facebook, BTC/Amazon, BTC/Twitter, BTC/ZAR. These are combinations of cryptos with leading stock indices and equities that bring the best of both worlds for traders.
With the broker accepting both deposits and withdrawals in cryptocurrencies, trading these synthetic pairs also becomes easier. Traders no longer need to exchange fiat to crypto to back to be able to make the most of trading opportunities.
Benefits for Affiliates/IBs
With a large part of the interest in cryptocurrencies coming from beginner traders, the demand for information and education has also been rising. This gives a huge advantage for affiliates and introducing brokers. By providing useful guides, tutorials, analysis and news, they can offer rich educational resources that can help traders make informed decisions.
Brokers, need to provide all the necessary partner support via affiliate programs to help their affiliates and IBs to better onboard and support their clients' cryptocurrency trading journey.
gt.io
Our top priority is our traders and partners. We seize every opportunity of improvement, striving to find ways to improve our trading experience and ensure the most favourable trading conditions. We remain at the core of the digital transformation of currencies and we embrace the widespread adoption of cryptocurrencies. That is why we are better every day, offering you more than what is out there.