Trading Bitcoin Contracts for Difference (CFDs)

Futures are a special type of investment asset that allow you to invest in various commodities. From gold to cattle, and everything in between, futures expand the field of available investment opportunities to pretty much any commodity of value. Futures are essential for setting global prices on important commodities, such as oil, and support complex global markets, such as markets for agricultural goods.

When you purchase a Litecoin or Bitcoin future, you are basically signing a contract to purchase something at a later date, at a specific price. So if you buy for example a Litecoin future for 1,000 Litecoins, you are actually buying a contract for the delivery of 1,000 Litecoins, once the contract comes due. Most traders, however, sell their futures contract before it comes due and the Litecoins are delivered.

One way traders can avoid having to physically accept delivery of a commodity is through a “Contract for Difference.” In this case, the buyer and seller agree to pay any difference as prices rise or fall in cash, instead of through the delivery of physical goods. A Litecoin or Bitcoin contract for difference allows an investor to tap into the benefits and risks of Bitcoin /Litecoin trading without having to physically own the coin itself.

Let’s go back to our Litecoin example to see how this works. Let’s assume that you are very confident that Litecoin prices will rise in the near future and you want to invest in Litecoin. Now, you could go out and purchase Litecoins, but can sometimes be a very complex process since purchasing Litecoins isn’t all that easy today.

Instead of buying actual Litecoins, or even a future that would require the future delivery of the Litecoin, you could purchase a contract for difference (or in short CFD). In this arrangement, you and the seller of the contract for difference would agree to settle any rise or drop in prices in cash on the contract date, which is the date that the contract ends. For example, you might sign a contract for difference with a major trading company such as Plus500 for Litecoin at today’s prices, with the contract ending at 10pm (since all Litecoin  trades at Plus500 have to end by that time. In this case, the current price of Litecoin will set the value to be traded. Meanwhile, you will set a contract time, in this case several hours into the future, which is the point at which any difference will be paid to either the buyer or seller.

If your intuition about rising or dropping Litecoin prices turns out to be correct, and prices change through that time frame, you will be paid the difference by the trading company. On the other hand, if your intuition turns out to be incorrect and prices don’t go as you expected, you will have to pay the difference, in this case to the trading company. In a certain sense, the buyer and seller are essentially betting on whether or not prices will rise or drop.

Contracts for differences offer investors ways to make money off of changes in Litecoin prices without the hassle associated with directly trading Litecoin. As such, contracts for differences are very popular among traders and numerous different brokering firms. Such contracts allow investors to generate profits off of changing conditions in global markets as demand and supply rises and falls for various commodities.

Keep in mind that when trading Litecoin CFDs your capital is at risk. Trading Litecoin CFDs is more suitable for experienced traders.

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