How to Trade CFDs on Cryptocurrencies – Complete Guide 2018
Reading time: 21 minutes
The genesis of what we now know as cryptocurrencies transpired back in 2009, and it all began with the launch of Bitcoin, the proto-cryptocurrency. Bitcoin was originally proposed as an electronic payment system based on cryptographic proof. The cryptographic proof came from the emerging technology of the blockchain — a kind of list of digital signatures that provides computational evidence describing the entire transaction history of each Bitcoin. This public chain of ownership allows peer-to-peer transactions without any need to entrust a third-party with processing the payment.
This lack of any kind of third party operating in a single, supervisory role means that Bitcoin is a decentralised digital currency. Back in 2009, some market commentators dismissed this new, virtual currency as a mere fad, a transitory reaction to the subprime crisis that had racked the global economy in 2008.
But as Bitcoin has grown in value and credibility over the years, interest in this new type of currency – and the technology framework that underpins it – has blossomed. As more investors have embraced Bitcoin over the years, its value has been driven higher, which in turn has driven greater interest in the asset class. This has led to a breathtaking increase in value and volatility.
As a consequence of the former, a large number of alternative digital currencies have arrived on the scene (and sometimes departed just as quickly), based on the innovation of the blockchain or similar such concepts. In early 2016, the combined value of all cryptocurrencies was around $8 billion; by March 2017 this had ballooned to around $25 billion. At the time of writing, in February 2018, the market capitalisation of Bitcoin alone is more than five times this amount.
What Are the Other Significant Cryptocurrencies?
Bitcoin was by far the earliest cryptocurrency, arriving more than two years ahead of the second cryptocurrency, Namecoin. The success of Bitcoin has led to a massive proliferation in digital currencies in recent years and today there are literally hundreds of cryptocurrencies in existence.
One of the most interesting aspects of these new currencies is the lack of control by any single body. Traditional fiat currencies are governed by Central Banks that may operate independently of a national government or at the behest of the government. The Fed has the power to increase the supply of US dollars, for example. The degree of decentralisation can vary from one cryptocurrency to another – as we shall see – but, in general, there is no central authority that plays an analogous role to a central bank with cryptocurrencies.
We're now going to take a look at four of the other major cryptocurrencies.
Ethereum, or Ether, is the largest rival to Bitcoin, based on percentage share of total cryptocurrency market capitalisation. Other significant players in the field include Bitcoin Cash, Litecoin, and Ripple. Cryptocurrencies are quoted against the US dollar (USD) and the euro (EUR), two of the world's most widely-used currencies.
The following list shows you the codes used to represent these major cryptocurrencies against the US dollar:
Bitcoin against dollar
Ether against dollar
Bitcoin Cash against dollar
Litecoin against dollar
Ripple against dollar
Similarly, the list below shows the codes for the major cryptocurrencies against the euro:
Bitcoin against euro
Ether against euro
Bitcoin Cash against euro
Litecoin against euro
Ripple against euro
Why Trade CFDs on Cryptocurrencies?
Cryptocurrencies are made possible via the emerging technology of the blockchain, the public ledger that keeps a record of all transactions (or similar consensus ledger systems). Since the outset, the potential of both this new type of asset and the technology in general has engendered interest in specialist quarters. In recent years, cryptocurrencies have begun to attract attention from a much wider audience, as Bitcoin has been accepted as a means of payment in increasingly more places. Cryptocurrencies have also begun to generate a lot of interest as an alternative investment.
A large part of this is down to headlines generated by the huge leaps in Bitcoin's value. The price of Bitcoin began 2017 worth around $1,000, rocketing to more than $19,000 by December of that year. When prices move quickly, traders pay attention.
Many people gain an exposure to cryptocurrencies by simply putting money into them – that is, buying the actual digital currency. There are downsides to this, however. Processing times for buying a cryptocurrency are slower than the instant fills that typify an Forex trade; they are unregulated; and there have been scare stories of compromised Bitcoin and Ethereum wallets.
You can easily sidestep all these concerns by trading cryptocurrencies via CFDs. Using CFDs allows very fast transaction times, which is useful for such a volatile market. Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA), so that our Bitcoin CFD trading is regulated in the same manner as normal FX.
How to Buy Bitcoin
As we touched upon in our preamble, Bitcoin is the eldest child in the cryptocurrency family. Dating back to 2009 makes it substantially older and more established than its nearest cryptocurrency rival in terms of capitalisation. Because it is the most mature cryptocurrency, it shouldn't come as much of a surprise that it generates the most headlines. In 2017, those headlines were plentiful, on account of Bitcoin's remarkable growth in value.
You can track Bitcoin's 2017 gains from the chart below:
Source: MetaTrader 4 platform, data from Admiral Markets, BTC/USD daily chart, April 2017 to December 2017
One way to profit from such increases in value is to actually buy Bitcoin and store it in a Bitcoin wallet, the aim being to sell it later at a higher price. A much simpler way to speculate on the value of Bitcoin is to trade BTC/USD using CFDs. All that's required is to open a live account and then you can readily trade BTC/USD from a chart using MetaTrader 4.
It's worth stressing how volatile Bitcoin can be, of course. Valuations in early 2018 have pulled back substantially from the highs seen at the end of 2017, and this correction has been accompanied by some wild swings in price. Some traders might approach such volatility with caution, while others might interpret it as a buying opportunity, while others might see potential in shorting the price and looking for further falls. The choice, of course, is yours. You can read more by taking a look at our How to Trade Bitcoin CFDs article.
Learn to Become a Bitcoin Cash CFD Trader
Bitcoin Cash is what is known as an altcoin — a virtual currency that works technically in basically the same manner as Bitcoin. In fact, Bitcoin Cash is simply an offshoot of Bitcoin, resulting from a hard fork in the blockchain. A hard fork is effectively a divergence in the transaction record into two separate and incompatible chains, each governed by a different set of rules.
The hard fork in Bitcoin that created Bitcoin Cash arose from a bottleneck in the Bitcoin network caused by the size of blocks. This constraint on capacity created a problem of higher fees and delays in transactions and led to a section of the Bitcoin community seeking to increase the size of each block in order to ameliorate this scalability problem. Another section of the community wanted to keep things as they were, and in August 2017 the blockchain split. Bitcoin Cash adopted larger blocks in a new branch of the blockchain and mainline Bitcoin continued with the original chain.
The clash is as much an ideological one as it is a technical one, with issues of decentralisation and security at the core of the argument. To keep tabs on how the price of Bitcoin Cash has changed over time, just log in to MT4 with your Admiral Markets trading account, right-click on the Symbols window and select Show All. Now look in the list for BCH/USD. Right-click on this and select Chart Window.
Source: MT4 platform, prices from Admiral Markets, 7 February 2018
Take a look at our introductory article What is Bitcoin Cash? to read more about this altcoin.
The history of Litecoin began in 2011, when it was created by Charles Lee, while still an a employee at Google. Litecoin was, for a while, the second-largest cryptocurrency, gaining a reputation as being the silver to Bitcoin's gold.
It has in recent years been eclipsed by other, newer cryptocurrencies, though, not least being Ethereum's ether. Litecoin's core aim was to provide an alternative to fiat currency for payment. Though Litecoin is technically very similar to Bitcoin, it does offer faster transaction times and lower transaction fees, meaning it is more suitable for smaller transactions. At the time of writing, Litecoin is the sixth-largest cryptocurrency, in terms of market capitalisation.
Aliant Payment Systems, a US-based payment services merchant, announced in February 2018 that they were adding Litecoin to their range of services, alongside Ethereum and Bitcoin.
To discover more about Litecoin (LTC), have a read through our article discussing What is Litecoin?
What is Ethereum? Ethereum (also interchangeably referred to as Ethereum and ETH) is a decentralised, blockchain-based computing platform. Which is to say, where Bitcoin is a currency pure and simple, Ethereum is a whole lot more. It takes the technology at the heart of Bitcoin – the tamper-proof public ledger known as a blockchain run by a network of nodes – and uses it as the infrastructure for a system that proposes to turn the way the cloud works on its head.
Rather than apps, payment services, and cloud storage being operated by single parties, Ethereum proposes a network where no single entity governs these processes. To use this network, you need Ether. Ether is a cryptocurrency that allows you to pay for transactions and services within the Ethereum network. You can therefore think of Ether as being the fuel that powers the platform.
How else does the Ethereum vs Bitcoin comparison look?
Well, Ethereum offers substantially faster transaction times than Bitcoin, owing to its shorter block time – the mean amount of time for the network to generate another block in the blockchain. This also means lower transaction fees than Bitcoin. Perhaps most interesting of all is that Ethereum offers smart contract functionality – a new technology that has been opened up by blockchains. Basically, a smart contract enforces the terms of a relationship with cryptographic code.
You can read more about how this works and ETH/USD trading in our What is Ethereum? article.
Ethereum has quickly grown in popularity and is currently the second-largest cryptocurrency by market capitalisation ($80 billion at time of writing).
Ripple and XRP
What is Ripple? First, Ripple (sometimes also called Ripples or XRP) is a payment protocol that allows peer-to-peer money transfer. Like Bitcoin, it uses a public ledger for security that is constantly validated by a network of independent servers. Ripple is also the name of the company that runs the protocol, headquartered in San Francisco. Ripple is also used interchangeably for the native digital currency of the protocol.
The Ripple system was conceived as having a wider scope than Bitcoin, purporting to allow fast, secure financial transactions of pretty much any type. It doesn't just support XRP, but all currencies. Ripples are the tokens that support the payment system, and they are the third-largest cryptocurrency by market capitalisation.
For a more in-depth discussion of Ripple, try reading our article What Is Ripple?
Users need to have a small reserve amount of XRP on their account to act as an obstacle to hackers attempting to flood the network with fake accounts. For similar reasons, each transaction incurs a tiny XRP charge to preclude a flood of fake transactions.
Ripple does not use mining like Bitcoin to create new tokens (see the mining section below). Instead, the founders created 100 billion XRP at the beginning and say that is it – no more will be created, based on the rules of the protocol. Somewhat controversially, a large chunk of that XRP remains in the hands of the founders.
There are questions of how decentralised the protocol actually is, but at the same time, this cryptocurrency and payment system has garnered attention from mainstream financial institutions in a way that has eluded other rival virtual currencies.
If you'd like to read more about how to buy Ripple, you may find our article How To Trade Ripple CFDs of interest.
How Does Mining Fit into All This?
If you have a passing familiarity with either Bitcoin or cryptocurrencies in general, you have likely come across the term of mining a digital currency. In this context, what is mining exactly? To answer that question, we need to examine the creation of cryptocurrency.
The terminology originated from Bitcoin and stems from the fixed number of Bitcoins that will ultimately exist (21 million) according to the Bitcoin protocol. Only a certain number of these have been 'unearthed' so to speak. Mining involves unearthing new cryptocurrency and this actually happens as a reward. This reward is an economic incentive given to a miner for the work done creating new blocks of validated transactions and therefore contributing to the upkeep of the network. It was also designed as an initial mechanism for distributing coins in the intentional absence of a central authority.
Cryptocurrencies rely on nodes. These are computers or servers that work together to exchange transactional information around the network. A mining node is effectively trying to win a race to solve a computational puzzle — an exhaustive search of possible inputs that when combined with data in the current block and passed through a cryptographic hash function will give an acceptable solution.
The first node to do this 'wins' the race and adds a new block to the blockchain. This gives a new hash for the next block that defines the next puzzle to be solved. The reward is a certain number of the cryptocurrency in question. For Bitcoin, this is currently 12.5 Bitcoin.
Solving the puzzle is made intentionally difficult to prevent someone going back to alter information in old blocks. Modifying a past block in this way would also require you to redo the puzzle solving for all the newer blocks chained after it. The difficulty involved makes it extremely unlikely that such an attacker could keep up with the addition of new blocks by honest nodes.
Boiling it all down to the nuts and bolts, the process was designed to issue a steady stream of Bitcoin, while also maintaining the credibility and security of the transactional history – without relying on oversight from some central authority.
The original Bitcoin proposal by Satoshi Nakamoto actually introduced the mining term, saying: the steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation.
Is the mining of Bitcoin profitable? Or should you instead mine Ripple or another cryptocurrency? The short answer is: it's not profitable for most people anymore. The Bitcoin protocol aims to yield a steady flow of tokens (one every ten minutes). It follows that the more people mining, the greater the difficulty of success. So back in the early days of Bitcoin, it would have been possible for an individual to profitably mine Bitcoin. The competition now is so fierce though that extremely powerful, dedicated computer hardware is a necessity, running 24 hours a day.
As you can imagine, this comes with an attendant cost in electricity that is substantial. Rather than mining as individuals, people pool their resources to set up mining farms. These are data centres running thousand of machines, located in areas with low electricity costs.
As an individual, it is actually much more convenient to trade the valuation of a cryptocurrency by using CFDs. Trading CFDs offers a quick, simple and versatile way to speculate on the price of a variety of major cryptocurrencies. In the next section of this article we'll look at how to do this, But first let's reiterate some useful links from the ground we've already covered, offering an introduction to the various leading cryptocurrencies:
Now that you're up to speed with the big names, let's move on to actually getting started trading cryptocurrencies.
You'll be pleased to hear that it's a simple and easy process with Admiral Markets to trade all the cryptocurrency CFDs listed above on one single account.
How to Connect to a Cryptocurrency CFD Trading Account in MT4 or MT5?
- Open a Live Trading Account with Admiral Markets;
- Download MT4 or MT5 to use as your cryptocurrency trading platform;
- Open the platform and click on the File tab at the top left of the screen;
- Select Login to Trade Account and enter your trading account details;
- Open the cryptocurrency CFD chart of your choice;
- Click New Order when you want to buy or sell.
You can read more about opening an account and logging in to MetaTrader with our rundown of How to Open a MetaTrader 4 Account.
Where Do I Find Cryptocurrency CFDs in the MetaTrader 4 Trading Platform?
If you can't see the cryptocurrencies you want immediately in MetaTrader, just go to the MarketWatch window on the left-hand side of the platform. In that window, you should see a list of market symbols. This may not be an exhaustive list of all the markets that are available for you to trade with Admiral Markets, however. To see this list, just right-click in the MarketWatch window and select Show All. You should now see cryptocurrency CFDs in the list of prices, as shown in the image below:
Source: MetaTrader 4 platform, prices from Admiral Markets, BTC/USD hourly chart, 8 February 2018
To launch a cryptocurrency chart, just click on the symbol and drag into the chart window on the right. Alternatively, right-click on the cryptocurrency of your choice and select Chart Window.
How to Open and Close a Position in the Ethereum Cryptocurrency CFDs?
Placing an order on a cryptocurrency is very easy with MetaTrader 4. Let's run through an example of how to open a cryptocurrency position using Ethereum.
For this example, I used an enhanced version of MT4 by downloading and installing the MetaTrader 4 Supreme Edition plug-in. The MT4SE plug-in is free to download and gives your platform a big boost in terms of the available number of indicators and expert advisors.
Cryptocurrency Invest Example: Opening an ETH/USD Position
For this, I used the Mini Terminal EA. Once you have installed MT4SE, you should see this listed as Admiral – Mini Terminal in the list of Expert Advisors in your Navigator, as show in the image below:
Source: MetaTrader 4 platform with Supreme Edition plug-in installed, Mini-terminal order ticket of ETH/USD, 8-February 2018
I first opened a chart for the ETH/USD and then double clicked on Admiral – Mini Terminal to launch the EA. As you can see, this gives you a small order ticket. I chose 1 lot as my order size and then by pressing CTRL and clicking in the S/L field (that is, the stop-loss field), I opened up the S/L calculation dialogue box that you can see below the mini terminal.
This function allows you to specify the amount of risk you want to take on board with this this crypto position. You can define this either as a flat amount in your account's base currency or as a percentage of your account's free equity. The mini-terminal will then calculate the stop level for you that matches your specified amount of risk.
Then, it's as simple as clicking Sell or Buy to take a position in your chosen cryptocurrency CFD. Optionally, you can also set a take profit level and/or a trailing stop, if that's what you want, using this MT4SE tool.
So, you take a position in your cryptocurrency of choice. How do you then go about closing the position?
There's more than one way to go about this. Let's first look at closing just part of the position.
Example: Partial Closing of ETH/USD Position
Sometimes, it can be beneficial to reduce your exposure by closing off a portion of your open position. You might, for example, want to realise some profit on a winning position, or lighten your size on a losing trade. Either way, by partially closing, you retain some exposure to future price moves.
When you have opened a position, you will see lines marked on the relevant cryptocurrency chart that represent your trade and any associated stop-loss or take profit orders.
Source: MetaTrader 4 platform, price data from Admiral Markets, ETH/USD hourly chart, 9 February 2018.
As I placed a Buy trade, my position is shown with a green box. Had I sold, this would instead be a red box. Clicking in this box opens a web dialogue window which offers you a variety of options, such as to amend any stop-loss or take profit orders you have. I clicked on Partial Close, and you can see from the image above the dialogue that this option presents. I entered 0.5 into the Volume field, which would allow me to close off half of my 1 lot open position.
Example: Total Closure of ETH/USD Position
Closing your whole position is no more complicated than making a partial closure. All you have to do is make sure your trading size is the same as the open position and deal in the opposite direction. I originally bought 1 lot of the ETH/USD to open my position. To close this, I would need to sell 1 lot of the ETH/USD.
Just as above, I could click on the green box that represents my open position and this time just click on the red Close Order button, without first clicking Partial Close.
Source: MetaTrader 4 platform, price data from Admiral Markets, ETH/USD hourly chart, 9 February 2018.
An Easy Way to Get Started
So, now you've read about the different cryptocurrencies and how to trade them with CFDs, how do you take your first steps into the world of cryptocurrency trading?
A risk-free way to give it a try is with one of our Demo trading accounts. This allows you to explore the functionality of MT4 and place orders on live cryptocurrency CFD prices, but without risking any money until you feel confident enough to open a real position with a live trading account.
Further Cryptocurrency CFD Trader Training
We hope you enjoyed reading our guide to the state of play of cryptocurrencies in 2018. If you want to continue your cryptocurrency course, you might enjoy our discussion of the merits of Trading Cryptocurrency CFDs vs Traditional Investing.