Total Beginners Guide to Trading Cryptocurrency CFDs
Two Blokes Trading are very pleased to be launching The World’s First (probably…) Crypto Currency Trading Competition.
…We had a quick Google…maybe there’s another one… but we couldn’t see it…don’t write in…
30 days trading from 11th November, 100k demo funds, no leverage. The trader with the best Return on Investment in the 30 days wins £1000 first prize of real money and a guest interview with us on the Two Blokes Trading podcast!
We are launching the competition in conjunction with XTB, our broker partner, as they offer 5 different cryptocurrencies available to trade as a CFD.
Many of you have signed up and are raring to go! But, we’ve also had a few questions from people who are beginners. They are usually either cryptocurrency investors who don’t know how to trade CFDs or CFD traders who don’t know much about cryptos.
Don’t worry, we are here for you both!
But first! Why is it not available in my country?
Unfortunately there is nothing we can do for you if you live in the USA, Australia or a few other countries.
One of the big differences between CFD trading and regular investing in cryptocurrencies is that you have to use a broker. We have partnered with XTB who are FCA regulated and have a licence in the UK and a lot of other countries, but they don’t currently have an Australian licence (for instance.) The other side of it is that CFDs are not legal in some countries, notably the USA, and there is simply nothing that we can do about that!
No Risk Practice
The Two Blokes Trading Crypto Trading Competition is a DEMO trading competition. You will be credited with $100k of pretend money when it starts on day 1. So there is no risk to you. In fact, with a £1000 cash first prize your Reward to Risk ratio is technically infinity!
If you are new to trading or new to cryptos we would strongly caution you to not trade with real funds until you’ve got your head around it with demo. This is because whatever your background, crypto CFD trading is a totally different beast!
Beginner 1: I am a trader but I’ve never traded cryptos
If you are coming at this from a Forex or Equities trading background then there are a few things you need to know:
- The volatility is crazy! Seriously. On XTB the daily Average True Range of EURUSD is about 80 pips at the moment. On Bitcoin it is about 32,000. Yes. That isn’t because Bitcoin moves in actual monetary value by 400 times as much or in percentage times by a factor of 400 either, but rather because of the way that Bitcoin pips are calculated. The percentage and dollar value moves are much greater as well, maybe about 10% versus 1% for Forex pairs in a big day. Basically, be careful with your position sizing and understanding of exactly how much you are betting in either direction!
- It is a 24/7 market. Because Bitcoin and other cryptocurrencies are traded between private individuals with very limited institutional involvement, there is no weekend break in the market. Of course, like Forex there is no centralised exchange so there are also no daily market hours like there are in shares trading. This means that you can trade CFDs with XTB 24 hours a day, 7 days a week. There are a couple of hours of scheduled downtime on a Saturday for platform maintenance but that is it.
- There is (currently) limited institutional involvement. Right now most crypto buying and selling is done by private investors with some limited hedge fund involvement. This is changing, however, with more and more institutions getting involved, in particular in Bitcoin. But right now the markets are driven by individuals around the world, not by Goldman Sachs or JPMorgan traders. If you know your Forex trading, you will know that this fact is likely to change the way these cryptos move when compared to Forex. The exact strategy I’ll leave to you. 😉
- They are brand new. Similar to the point above, a lot of these cryptos are very new. At least when compared to Pound Sterling! Trading them as a CFD is certainly brand new. That means that support and resistance zones are still being created. Most are at all time highs, or close to them, so we are constantly in uncharted territory. Tom has mentioned on our podcast that Bitcoin appears to move between levels almost exclusively based on round numbers. So 5000 to 4000 to 3000, back to 5000 then 6000. Maybe the 4500, 5500 etc numbers are relevant too. Maybe that’s one strategy…maybe that’s total bullshit – you decide!
- The spread is wider. Last point, and one that you might be narked by, but need to be aware of before you start. The volatility on these products is really high, they are brand new, and it is harder for the broker to process the trades in the market. That means the spread is wider. But, don’t forget that a lot of this is offset by the extra volatility – so what may look like a ludicrous number of pips for a spread is perhaps reasonable when you realise what it is as a percentage of ATR.
Beginner 2: I am crypto investor but I’ve never traded CFDs
If you have bought and sold cryptos on an exchange like Coinbase and are familiar with software and hardware wallets then you are in a strong position for this competition. But, you will also need to get your head around some CFD trading basics.
- CFDs are a synthetic product – you never actually own the cryptocurrency. This might be a stumbling block for some people, but just remember that you will benefit if you buy a crypto when the price goes up. You get the same rewards in terms of the value of the thing that you can now sell for a profit. You don’t need to understand fully how CFDs are priced in order to trade them, but if you are curious then read the ‘Mechanics of Trading’ section in this blog.
- You can make money when the price goes down. When you are investing in cryptocurrencies and buying the physical asset, you can only make money if the price goes up. If the price goes down then you lose money. But with CFD trading you can go ‘Short’ and make money when the price goes down. This is because it is a ‘synthetic’ financial product known as a derivative. In effect you are selling the crypto and buying it back at a lower price – thus banking the difference. But don’t worry about that – just know that if you hit SELL and the price goes down, you make money.
- You can use leverage. Normally when trading CFDs you can use leverage. Some brokers offer up to 500:1. That effectively means that if you want to buy $500 of Bitcoin you only need to have $1 in your account. This increases potential profit, but also massively increases risk. For this competition however, we are turning off the leverage. That is because we want it to be a test of skill, not luck. The person who bets it all on max leverage on a ‘long’ Ripple trade on day one and it doubles in value will make a bazillion percent. But that’s daft because only a lunatic would do that in real life. $100k in pretend funds is more than enough to participate in any crypto market. Once the competition is over, if you move to a real-money account, then you use some leverage if you wish. But be sensible and be careful!
- Can you lose more than you bet? A lot of investors worry about CFD trading because of the warnings that ‘losses can exceed your deposit amount’. And while that is usually true (though very rare!) it is no longer a problem for XTB traders. XTB have just announced that they have become the first FCA regulated broker to provide ‘Negative Balance Protection’. That means that losses can no longer exceed your account balance! Yay!
- The Broker is regulated. Anyone who has invested in cryptos for a while will remember the Mt Gox debacle. Something like that can never happen with XTB as they are fully FCA regulated. That means that they are responsible with your money and that the UK Government guarantees up to £50,000 of your deposit if the broker goes bust and they have been naughty and not segregated your funds. (Which they will have done, because they are FCA regulated…)
Good Luck and Enjoy the Experiment
We really hope all you beginners sign up to the competition. The vast majority of us are new to either trading or cryptos (or both!) so it is a learning journey for all of us.
This is a no-risk, free to enter demo competition. It is the perfect time to try your hand at crypto trading. No one is expecting anything from anyone! I dare say a lot of people will lose a spectacular amount of money. Probably us! No shame in that when it is a demo experiment.
But maybe some people will find a good strategy. Maybe this can be a springboard for them, and if they are feeling generous maybe they will share their ideas with us at the end!
Good luck, enjoy yourself, and we look forward to interviewing the winner on the Two Blokes Trading podcast!
Owen + Tom