Contract for Differences (CFD) – What is it, and how does it work?


A contract for difference (CFD) is a contract between two parties that enables them to enter into a trade agreement, stipulating that the buying party must pay the selling party the difference in amount between the current value of an asset and its value at the contract time. Trading crypto CFDs means one can make a loss or profit regarding which direction the asset in question moves in.

Unlike other trades like forex, stock, bonds, and physical ownership securities, in crypto CFDs, investors do not own any physical assets. Instead, they trade on price margins attached to underlying cryptocurrency price depending on the market value of that asset. It is essentially making bets on whether an asset price will rise or fall. Here are some main features of CFDs:

· Short and long trading CFDs offer you a platform to speculate on prices by opening CFD positions that enable you to profit due to market prices decreasing. It is referred to as selling or “going short” centrally to buying “going long.” Once the prices are closed, then profits and losses are determined.

· Leverage in CFD trading means you can land a good position without having to pay the total price. A leveraged position helps you spread your initial capital; further, it is good to note that the profits and losses will also be spread as far, and in the case of a loss, you could lose more than you invested.

· Margin funds are required to open a position and maintain it, representing a fraction of the total size. There are two types of margins; one of the deposit margin that enables you to open a position and the maintenance margin used to revamp your position if you are about to incur losses.

· They are hedging as CFDs are used to put a hedge on an already existing portfolio. For example, if you believe a particular share in a company would suffer a price dip, one could offset the market by going short on the market through CFDs.

How do CFDs work?

In the following segment, we explain how CFDs work in trading, deal sizes, duration, spreads losses, and profits.

1. Spread and Commission

CFD prices are quoted in two types: the buying price and the selling price. The selling price (bid price) is the amount you use to open a short CFD, the buy price (offer price) the price you open with a long CFD. The sell prices are usually lower than the current market price and the buy price a bit higher. The difference in these two prices is known to be the spread. The cost incurred to open a CFD position is often covered in the spread, meaning the buy and sell prices are adjusted to reflect the trade cost.

2. Deal Size

CFDs are traded in harmonized contracts (lots); an individual contract varies depending on the asset being traded after the asset has been mimicked on its actual market price. A CFD shares the contract size representing one share in the company you are trading for.

3. Duration

CFD trades have no fixed time limit; a position is closed by betting in the opposite direction on the one that opened it. If one keeps a trading position open past the daily off-time on is charged an overnight funding fee.

4. Profits and losses

This is how you calculate the profits or losses incurred in a CFD trade. You multiply the total number of contracts (Deal size) by the total value of each contract. The figure you get, you multiply by the difference in points between when you opened the contract and closed it. To get an exact amount of profit or loss, you could subtract any charges you incurred.


CFD Country Restrictions

There are countries like the USA that do not allow CFD trade. Other countries like Spain and the United Kingdom (to name a few) allow CFD trade. Other countries allow the trade but have imposed few restrictions and changes like Australia.


Advantages and Disadvantages of CFDs

Advantages include high leverages in comparison to traditional trade. Many CFD brokers offer a global platform of trade, and this offers a worldwide market. Many brokers in this field offer trading services as one package hence reducing professional fees. Additionally, there are no Day Trading requirements, and there are a variety of opportunities to trade.


There are weak industry regulations, and any credibility is based on reputations. Traders also pay for the spread, which decreases the possible profits from a trade.

The risks involved are significant as one could lose all their investment if they unexpectedly bet on the market.

The advantages outweigh expected disadvantages in the market; as a trader, this is an investment opportunity you should do research on and trade carefully. Visit platform and start trading Bitcoin CFDs.

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