ETF vs CFD: Which one should you choose?

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ETF vs CFD: Which one should you choose?

You can begin your crypto trading journey in numerous ways. The most common choices are either peer-to-peer trading or through an exchange. Today we’ll be tackling ETFs vs CFDs.

With the expansion of Bitcoin and other cryptocurrencies, two other ways of trading options have gained massive popularity. This, in turn, has started to attract the eyes of users in the crypto trading business. These two other options are purchasing cryptocurrencies using:

  • CFD (Contracts For Difference); 
  • or ETF (Exchange Traded Funds).

This guide will take you through what each of these trading options is and which might be the best for your trading needs. Be sure to read it until the end, so you don’t miss out on anything.

What is a CFD?

The Contract for Difference trading, also known as CFD trading, is a way of crypto trading that enables traders to invest and trade in an asset by engaging a deal within the broker and themself, instead of opening a position straight on a certain market. 

Contract for difference - ETF vs CFD

This means that the broker and the trader have a mutual agreement to replicate the circumstances of the market and resolve the difference between them when the position closes. A CFD offers many advantages when compared to other trading ways, such as the ability to access the overseas market, leveraged trading, and more. 

For example, if you buy $60 of Google CFDs and the price comes up by 2%, then the broker has to pay you $1.2. But if the price goes down by 2%, then you need to pay the broker.

ProsCons
Fees & LimitsLow fees and commissionsFinancing fees
User Experience24/7 customer supportSome CFD brokers have a complicated design
OtherTrade using Leverage & Instant Order Execution. Long and short position tradingInvolves higher risk

What is an ETF?

An ETF, also known as Exchange Traded Fund, is a sort of security that involves several securities such as stock that usually tracks an underlying index. It is named ETF because it’s traded on an exchange just like the stocks. 

etf trading - CFD vs ETF

The crypto ETF remains the asset and through an arbitrage trick, the value of the initial contract is near the crypto’s net price. Also, the prices of an ETF’s shares will fluctuate during the trading day as the shares are purchased and sold on the trading market.

For example, you are looking at stocks – and you look for specific ones that you think will increase in value at the end of the day; let’s take Apple. You go ahead and buy Apple stocks, and wait until it increases and if it does you sell it and you get the profit. This is the same with ETFs.

ProsCons
Fees & LimitsLower Fees & Limited Capital Gain TaxIntraday Pricing might be an overkill
TradabilityLiquid and easy to tradeLower Dividend Yields
OtherOpportunity to reinvest dividendsLimited diversification

Should you Leverage?

Leverage is using borrowed capital as a source of funds when investing to increase the potential return of the investment. Investors are using leverage to double their purchasing power in the market.

Pros and cons of leverage

Leverage is really a great thing, it can help you increase the value of your business. It is important, however, that you fully understand how leverage works before making use of it because while the use of leverage can be pretty profitable, the reverse will hit hard. If you make an investment with the leveraged funds and the investments go wrong, then you need to find a way to return the leveraged funds. 

For example, a business is formed only with a $10 million investment from the investors. The business can use debt financing to borrow $10 million more, and it now has $20 million to invest in something that can increase its value. 

Leverage trading infographic

Which is a more profitable solution: CFD or ETF? 

If you are looking for a short-term profit it is advisable to go with the CFD way. It is ideal for someone who wants to earn a lot of money for a small period, but this also comes with bigger risks involved.

An exchange-traded fund works as a collection of stocks or assets. An ETF broker is a broker who would also allow the buying and selling of ETFs. For this reason, it would be more suitable for investors whose goal would be to other financial assets, not just cryptocurrencies. If you are looking into growing your portfolio only in the crypto niche, then CFDs would be the best option here.

So overall profits can be made using both CFDs and ETFs, but you must gain some more specific insight into the world of trading. Remember, you can’t be a professional crypto trader with just basic knowledge, it takes years of experience to fully understand it.

Our top 6 picks for the best CFD brokers 

You can trade CFDs in a variety of markets and countries, but we gathered up 5 of the best CFD brokers that are strongly recommended by the community and offer great opportunities for a trader.

  • XTB is the best CFD broker in 2021. Free and quick deposit and withdrawal. Easy and secure account creation. We totally advise you to use this platform, it is trusted by thousands of reviews.
  • Trading 212 – Free deposit and withdrawal. 
  • IQ Option- 10$ minimum deposit and 1$ per investment.
  • Plus500– No commissions, authorized, negative balance protection.
  • AVA Trade- Award-winning innovative broker, excellent trading conditions.
5/5

What will you need to start trading?

Here is what you need to do in order to start trading cryptocurrencies. At the start, it might seem pretty hard and unthinkable for you to start trading, with all the graphs, currencies, wallets. Don’t worry, we will guide you through all the steps!

  1. Pick a reputable exchange to start trading on. We recommend sticking only to trusted ones, for example Plus500, Trading212, etc.
  2. Choose a cryptocurrency wallet. We would recommend you picking a hardware wallet, and one of our top picks for that is Ledger Nano X Wallet.
  3. Find useful information about cryptocurrency so that you can start trading.
  4. Buy cryptocurrency. You can either buy it using cash or more alternative methods.

Taxes & fees (UK vs the USA)

There are no taxes on purchasing crypto in the UK or even holding it for as long as you want.

And in the USA, virtual currencies are traded like wages. Federal income taxes and FICA taxes apply. And you need to report it in a Form W-2.

ETFs vs CFDs: match over?

It all depends on how risk-averse you are, both CFDs and ETFs are great crypto investment tools that will help you gain digital assets without physically interacting with them. So if you are a beginner then we would say that beginning with the ETF strategy would be ideal for you. With all the benefits that ETFs are offering, even a newbie can start trading. Don’t forget to do as much research as possible before you take the plunge!

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