What do you need to know about Bitcoin CFD trading in NZ?
Trading Bitcoin CFDs is becoming more and more popular around the world. However, Bitcoin CFDs can be quite risky if you are not familiar with all the nuances of the process. With that in mind, let's see what you need to know in order to successfully trade Bitcoin CFDs in NZ.
What are Bitcoin CFDs?
To start, let's talk about what Bitcoin CFDs are in the first place.
As you may know, CFDs are trading products that are very popular among traders. CFD itself stands for Contract For Difference, and it basically means that you trade a derivative product of some underlying asset. Usually, that includes forex, commodity, indices, and alike. However, you can really trade derivative products for any asset, as long as it has the value that others recognize.
In this case, that is Bitcoin — the first and largest cryptocurrency that was launched almost 11 years ago, in the early days of 2009.
Now, when you trade CFDs, you do not trade the underlying asset itself. In fact, you do not own it in order to trade. Instead, you can make a profit by determining how the price of the underlying asset will move in the future.
If you expect the price to go up and down, you can use that prediction to buy CFDs, and if your prediction ends up being correct — you make a profit. In other words, the only things you need in order to start trading CFDs are some base capital that you will use to buy them and your judgment.
The base capital is pretty easy to obtain for most traders, but the part about properly judging the situation of an underlying asset... well, that takes time and knowledge. However, we will talk more about that later.
Why should you trade Bitcoin CFDs?
You might be wondering — why should you bother with Bitcoin CFDs? Trading CFDs requires quite a bit of knowledge and understanding in the first place, so why should you go after Bitcoin CFDs, specifically? Not only that but why not simply trade Bitcoin on a regular crypto exchange?
The answer is simple enough — while CFD trading is more complicated and definitely riskier, it also has some unique benefits to it, such as:
1) The ability to make money regardless of price movements
As mentioned before, CFD trading does not include the underlying asset, but rather, predictions regarding its price. Simply put, you make a bet. If you expect the price to move down in the short-term future, and it does, you make a profit. If you predict that the price will rise, and it does, you also make a profit.
If you simply buy Bitcoin at a certain price, you will actually lose money if its price drops, as BTC that you now own is worth less than what you initially paid for it. This is not the case with CFD trading.
Another advantage is the ability to diversify your portfolio. There are plenty of platforms that allow multiple cryptocurrency CFDs, which is great if you are not absolutely sure in your prediction. Even if you are, it is never smart to keep all of your eggs in one basket.
Portfolio diversification is of great help to make sure that you won't lose all of your money, even if you make a wrong move. This is not unique to CFD trading, but it is something to keep in mind.
3) Leverage trading
Leveraged trading is also an option when it comes to trading CFDs, and it means the same as it does with any other asset — you get to bet as a percentage of a larger trade. You experience losses or profits based on the larger trade, meaning that you can make a lot more money than you should with your original investment.
One thing to note here is that trading with leverage is a lot riskier than regular Bitcoin CFD trading, which is risky enough by itself due to Bitcoin's extreme volatility. It is not recommended unless you are very experienced, and you know exactly what you are doing.
4) You don't need a wallet
This one should be pretty easy to understand. As mentioned already, you never actually end up owning Bitcoin when trading Bitcoin CFDs. Unless, of course, you choose to buy it in an exchange, but that has nothing to do with CFD trading.
With no real coins in your possession, you don't need to bother with setting up a Bitcoin wallet, remembering yet another password, or managing your private keys in a proper way.
5) Low Spread
Another thing to keep in mind is that CFD trading platforms calculate losses and profits by establishing a difference between the opening and closing trade. This can be very useful, although it is not without risks.
Negatives of trading Bitcoin CFDs
While we are on the topic of risks, let's see what dangers and negatives of Bitcoin CFD trading there are.
1) Margin trading is extremely risky
The first thing to note is something that we have already mentioned briefly, and that is the risk to your funds. Especially if you go for things like margin trading. Trading on margin is a sure way to increase your profits, provided that you get it right. However, the same applies to your losses if you get it wrong.
With Bitcoin, you can never be sure where the price will take you, and the same is true for margins, only the stakes are much higher, and you have less room for an error.
2) Bitcoin CFDs are not for long-term traders
Bitcoin CFDs are a great option for experienced day traders. However, if you like to invest long-term, meaning to buy BTC, store it, and wait for its price to rise in the future — BTC CFDs are not the best option for you.
A big reason for this is the fact that most CFD brokers will charge an overnight fee, meaning that you will have to pay extra if you did not close by the end of the day's session. Obviously, paying extra is not in your interest as a trader, so this probably is not the best option.
These are some of the issues with Bitcoin CFD trading that you should be aware of before you start. However, you should always do further research and identify more things that you may or may not like regarding the process of Bitcoin CFD trading.
How to get started with Bitcoin CFD in NZ?
Now we come to the truly important part, which is how to get into Bitcoin CFD trading. We call this the most important part because it is truly crucial if you want to make money and not just make random CFD trades hoping to make a lucky guess eventually.
That means that you need knowledge. Knowledge is a crucial part of trading, in general. If you want to trade stocks, you need to know how to do it, what to buy and sell, when to do it, etc.
If you want to trade CFDs, this is even more important, as you are guessing the price movements, often within the single day. Anything can happen at any time, this is true, but if we exclude the sudden and unpredictable changes, there are patterns that might help you predict how the market will move. You need to master the ability to read such patterns and learn how current events influence the markets, when are changes the strongest, what time of day, week, month, or year are prices going to grow and when will they drop, and more.
Now, when it comes to Bitcoin, this is exponentially more difficult because Bitcoin itself does not have an underlying asset that would give it value. Its value goes up and down based on investors' feelings. That is infinitely more difficult to predict, but it is still possible if you keep track of current events.
Much like any other asset, Bitcoin's performance changes in accordance with what is going on in the world. Positive news will give hope to investors, and they will buy the asset, thus increasing its demand, and causing its price to surge.
Negative news will make investors panic and sell before the price starts dropping, thus knocking it down themselves, along the way. Now, if you want to trade Bitcoin CFDs, you can benefit from both of these situations, but only if you are able to predict them. This is why you must learn to use advanced analysis tools, constantly keep track of new developments, and more.
This is what it means to prepare yourself for trading Bitcoin CFDs, and it is far from simple. It requires time, patience, research, and practice. You should always keep in mind that you must never invest more than you are willing to lose. In fact, it might be best to start off each move by assuming that you will lose your money completely. That way, there will be no unpleasant surprises, and only positive ones remain.
Other than that, there is one more factor that is very important, and that is:
Choosing the right CFD broker
Knowing how to trade, what to do, and when to do it is extremely important. However, knowing where to trade matters just as much.
We mentioned before that some brokers might charge the overnight fee if you don't close before the day is out. However, that might not be necessarily true for every broker. Many of them differ in slight ways, and finding the right one for you will ensure that you are satisfied at the end of each trade.
Here are some things that you should look for in your CFD broker:
- Location — naturally, you need your Bitcoin CFD broker to serve NZ customers
- Regulation — you should never deal with brokers who are not compliant with NZ regulations
- Trading cost — once you identify reputable brokers, you need to compare costs of trading to determine which is better for you
- Overnight fees — how much will the broker charge for staying open for more than a day
- Range of CFD markets — a wider selection of markets usually leads to better trading propositions
- Payment methods that the broker offers — you should check what methods you can use to deposit and withdraw money and make sure that they are useful to you
- Leverage — if you are interested in trading with leverage, you need to know what the broker offers. Rockfort Markets, for example, offers 1:2 leverage on Bitcoin CFDs, while some others might offer up to 1:5
Trading Bitcoin CFDs definitely brings a lot of advantages over trading on other assets, or even trading Bitcoin itself. However, in order to profit while doing it, you need to actually know what you are doing, and be sure of each of your decisions.
Even then, there is a chance that you will see losses, but that is a part of this type of trading, and it is something that you will have to live with. Despite this, you should do everything in your power to reduce the risks as much as possible, and the best way to do so is to learn all that you can and make a habit of keeping track of what is going on in the world, especially when it comes to borderless assets like Bitcoin itself.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a masters degree in finance and writes extensively about the financial markets and fin-tech industries.