Trust has been declining in crypto for a while and remaining confidence may be shattered by the crash of FTX. Those who retain the confidence to invest in digital currencies may find crypto a compelling investment due to the massive price movements, but many sadly mix up crypto investments with crypto CFDs and this carries significant additional risks.
A crypto CFD is an agreement between an investor and a CFD broker to exchange the difference in the value of crypto between the time the contract opens and closes. CFDs are leveraged products where traders use borrowed money from their broker. Crypto CFDs are generally not available 24/7, there are market openings and closings, therefore crypto CFDs can open with large gaps during high volatility.
Declining trust in crypto assets may cause illiquidity in crypto CFDs. If liquidity is low, volatility might increase significantly because prices are easier to manipulate. Gap risk is a factor that needs to be taken into consideration during times of high volatility. This is the risk when sharp breaks occur in the price with no trading in between.
Even though a volatile crypto CFD closes at a high price at the end of a trading day, the next trading day it may open with a huge gap causing significant losses or gains. Regardless whether a trader goes long or short, it is impossible to predict which way the gap will open.
Such a gap can trigger immense losses, far surpassing investors’ initial capital. The reason for this is that losses are calculated for the full value of the position, not just the margin deposit. In other words, trading crypto CFDs carries such a high risk that retail trading accounts might slide deep into the red. A reasonable approach would be to trade only with an amount that a given investor can afford to lose and being careful with leverage in light of the potential gap risk.
The gap risk has to be taken into account by brokers as well, otherwise margin calls might increase in the future for crypto CFD trades. Brokers should pay close attention to margin requirements and increase if needed.
When trading crypto CFDs, orders are executed at the broker, so when a trader buys such a product, the broker is the seller. If the trader loses, the broker makes money and vice versa. As such, there is a conflict of interest between the trader and the broker.