In 2017, the market capitalization of the cryptocurrency market skyrocketed, with Bitcoin reaching $20,000. Back then, cryptocurrencies were making the headlines every day, and more and more people were getting involved in the industry.
The recent development of decentralized finance has introduced new options to get involved in cryptocurrency trading, such as crypto loans, asset tokenization, or crypto derivatives for investors interested in this market.
Financial derivatives arising in the crypto sphere
The cryptocurrency market is a diverse ecosystem that attracts an increasing number of investors. Nowadays, there are more than 6,380 tokens and cryptocurrencies available, according to CoinMarketCap.
These cryptos focus on different applications and needs, most of them relying on the relatively new blockchain technology. They've also become a popular investment vehicle for retail and professional investors.
That's why cryptocurrency financial derivatives have gained popularity over the last few years, as they've become one of the best ways to speculate on the price of tokens, as well as to diversify investment portfolios and take advantage of a revolutionary monetary system.
A derivative is simply a financial product whose price and value are "derived from" another asset. In the crypto sphere, derivatives are products that replicate the price of an underlying cryptocurrency. Using these financial contracts allow investors to take advantage of cryptocurrency fluctuations, often with leverage and margin trading.
There are different forms of derivatives in the crypto sphere: futures, forwards, perpetual contracts, swaps, options, and CFDs. Retail investors in particular often use a cryptocurrency CFD to trade the cryptocurrency market over the relatively short-term, thanks to their increasing availability from online brokers.
What is a cryptocurrency CFD?
A cryptocurrency CFD, or Contract For Difference, is a financial contract between an investor and his/her broker to exchange the value of a cryptocurrency between the opening and the closing price of the contract.
When using CFDs on cryptos, a trader uses leverage and margin trading to benefit from the rise (and fall) of the cryptocurrency market - Bitcoin, Ethereum, Ripple, Litecoin or any other cryptocurrencies against fiat currencies or other digital tokens - by borrowing money from a broker to benefit from bigger market exposure.
Trading cryptocurrency CFDs and other derivatives are a great option for many investors
When investors want to buy and own tokens to use them or to sell them later at a higher price, they need to use an exchange. The latter allows them to buy cryptocurrency tokens with fiat or other cryptocurrencies. Then, they will own coins that they need to store and protect, ideally in a wallet of their own.
But for those who do not want to go through the complex process of using an exchange or want to take advantage of short-term token price movements without owning the coins, CFD trading is a great solution.
First, you do not own the coins, which means that you do not need to go through the long and complex process of buying and securing them. Then, CFDs allow you to profit from rising and falling markets, which means that you can benefit from all market configurations. Then, leveraged and margin trading through CFDs can magnify profits when you're right about the timing and the direction of your trading position.
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