Profiting From Bitcoin Price Decreasing
Many people are profiting from the Bitcoin and cryptocurrency boom by purchasing the actual coins and holding on to them. For these investors, the price of the coin they are holding must increase in order for them to make a profit by selling at a higher price.
But what about if you think that the boom is coming to an end? That the cryptocurrency bubble will burst and prices come crashing down? Can you profit from such a prediction? The answer is yes, and it relates to a specific product called a CFD (Contract For Difference) offered by many of the leading forex brokers.
CFD's are nothing new. To put it very simply, you are entering an agreement, a bet of sorts with a broker that the price of a specific commodity will either rise or fall. You never actually own the underlying asset and therefore CFD's can be offered on just about anything. Typically, they are offered on stocks, currencies and now cryptocurrency.
CFD's make it extremely easy for clients to enter into a market for any asset and trade on the price movements. Suppose you are a regular client at a particular broker and want to try your hand in Bitcoin. There are 2 potential scenarios relating to the price of Bitcoin:
1. You think the price will increase and want to profit
Here your broker has 2 options to satisfy you as a customer: 1) Go and source Bitcoin for you, put it into your wallet address and charge you the price at the time of transaction or 2) Enter into a Contract For Difference with you where you take up the BUY side of Bitcoin. Essentially, you are betting that the price will go up by taking the BUY side and the broker is taking the SELL side.
The latter option is much easier for the broker. Much less admin, no 3rd party requirements, and instant trade execution. For you the buyer, the only downside to taking the CFD option is that you actually don't own the Bitcoin and therefore can't actually use it, for example at a website as payment.
2. You think the price will decrease and want to profit
This scenario is where CFD's really shine through and show their value. If you think that the value of Bitcoin will go down, how do you make money from your prediction? You can't go and buy Bitcoin because you think the price will go down, it would defeat the purpose of your prediction. You don't have any Bitcoin to begin with so you can't sell what you don't have.
But with a CFD as outlined in the first scenario, you have the ability to this time take up the SELL side of the contract with the broker who takes up the BUY side. Now, you are betting with the broker that the price of Bitcoin will go down, without you actually owning the underlying asset of Bitcoin. Therefore, if the price does go down, you simply profit from your bet with the broker trough the CFD.
CFD Profit and Loss Calculations
When you enter into a CFD, it's very much the same as executing a standard trade on a currency pair except that the pair this time would be BTC (Bitcoin) / USD. Depending on whether you bought or sold, your trading platform will show profit and loss in real time as the prices move, just like they would do with a forex pair. You also close trades as you normally would so many things are similar with standard forex trading.
The one thing to watch out for is the expiry on CFD contracts. Once the expiry date is reached, the contract closes itself.