The Difference Between Crypto CFDs And Crypto Assets

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The Difference Between Crypto CFDs And Crypto Assets

Alongside the progress of cryptocurrencies for use with blockchain technology, trading brokers and professionals have developed cryptocurrency Contracts for Difference (CFDs) as a way to generate a return without actually owning any digital coin. This guide will explain the main differences between crypto CFDs and crypto assets, or coins.

Crypto CFDs vs Crypto Assets

The best way to explain the difference is through an example. Imaging you would like to invest in Oil and you are faced with 2 options.

Option 1: Your first option is to physically go to an oil company, purchase a barrel of oil for $100 and carry it home. Then, 2 years pass and you want to sell it. You take the barrel of oil, pop it on your car and drive it back to the oil company which will purchase your barrel for $130. And voila, you’ve made a profit of $30 in 2 years.

Option 2: Your second option is to head over to an online CFD broker and purchase an Oil CFD on its platform for $100. After the 2 years pass, you log back into the CFD trading platform to sell your Oil CFD. Since the Oil CFD mimics the price of oil you can now sell it back to the CFD broker for $130.
And voila, you’ve made a profit of $30 in 2 years by trading a CFD.

The exact same concept applies when trading any kind of CFD, including cryptocurrency CFDs such as Bitcoin CFDs.

Why and where do you buy Crypto CFDs?

Cryptocurrency Contracts for Difference are somewhat more complicated, although they can be simply explained as a contract for sale between a buyer and seller or broker. These contracts include a fixed price for the crypto asset, but you do not own the asset, only the contract. Your gain depends solely on the asset’s price movement in relation to the price stated in the contract.

Trading cryptocurrency Contracts for Difference successfully means correctly predicting the asset’s future price. Since you are not buying the actual asset, most CFD brokers will allow you to deposit only a small percentage of the value of your trade, thus allowing you to trade on margin.

You buy Crypto CFDs if:

  • You want to speculate on the price movement of an asset
  • Your sole interest is to invest in cryptocurrencies such as Bitcoin and then sell your investment for a profit
  • You are not interested in owning the actual asset as you don’t plan on sending or paying someone with cryptocurrency
  • You prefer not being responsible for the security and safekeeping of cryptocurrency assets
  • You would like to make a profit on both bullish and bearish markets
  • You would like to have the possibility to experiment with leverage trading

To buy cryptocurrency CFDs check out:

Why and where do you buy Crypto Assets?

Cryptocurrency assets are relatively easy to explain. They are the digital coins that you buy, normally from a cryptocurrency exchange, and then store in safe cryptocurrency wallets. Examples of crypto assets include Bitcoin, Litecoin, and Ethereum.

You buy crypto assets if:

  • You want to pay someone in Bitcoin or other altcoins
  • You want to send Bitcoin from your Bitcoin wallet to someone else’s Bitcoin wallet
  • You want to gamble in a Bitcoin Casino
  • You like the technology behind the asset and would like to own the asset
  • You want to be the sole person responsible for your investment with no other third party involved. (For this to be true you’ll also need to own and transfer your funds to a cryptocurrency wallet)

To buy crypto assets check out:

Leverage and Margin Trading 

Leveraged trading is, perhaps, one of the most significant differences between trading crypto CFDs and crypto assets. Traders who have experience trading forex or similar markets would already be familiar with this practice. Put simply, margin trading allows you to borrow a substantial percentage of your trade’s value from the broker, allowing you, therefore, to open larger positions than you would otherwise be capable of opening.

While trading on margin has its benefits, you mustn’t overlook the associated risks. In the same way that making the right prediction magnifies your potential gains, making the wrong prediction multiplies your losses, based on the leverage ratio.

Risks Involved

Margin trading is both a blessing and a risk in disguise, so you need to understand the potential risks before you start trading. Some of the top crypto CFD brokers provide you with tools to limit these potential risks in several ways. These tools can include:

  • Stop Loss Order – an instruction you can set before you open a position which will automatically close the position at a pre-determined value in order to limit your losses.
  • Take Profit Order – an automatic instruction which closes a position once your trade creates a pre-determined profit or margin
  • Close Limit Order – an instruction which automatically closes a position once the value has reached or passed a pre-determined figure

While setting these or other orders can help you manage your risk, you should never rely solely on them, and should follow your crypto CFD investments frequently.

Regulation

crypto legislation

Both crypto assets and crypto CFDs are difficult to regulate by any central authority, since cryptocurrencies are, by their very nature, decentralised. In fact, to this day, trading or owning cryptocurrency is banned or restricted in several countries. Similarly, CFD trading is also banned in certain countries, with the United States as a prime example.

In order to choose the best broker platform to use to trade either crypto CFDs or crypto assets depends very much on your jurisdiction. For example, while most crypto CFD trading platforms do not accept US-based users, eToro is able to accept them since the platform also offers crypto assets.

Generally, brokers offering crypto CFDs are better regulated than those offering cryptocurrencies, since they often also offer other CFD markets, such as forex or stocks.

Ownership

When you buy €1,000 worth of XRP on an exchange, the coins are yours to keep and use as you like. You can use your cryptocurrency to buy products online, to send funds to someone else or to retain for future use.

On the other hand, when you buy €1,000 worth of XRP CFDs on a broker platform, such as eToro, you never own the actual coins. Your position is only open until either you or your broker close it. Once the position is closed, you have no link to the cryptocurrency.

Short vs. Long-term Investment

Another significant different between crypto assets and crypto CFDs is the length of time between the moment of purchase and the subsequent moment of sale.

Cryptocurrency CFDs are generally more popular as short-term trades. This trend is probably due to the fact that when you day trade or short sell cryptocurrency you are often required to pay a fee in order to keep a position opened after the end of the day. This fee can quickly eat into your margin, so it is generally recommended that you always close your CFD positions daily.

On the other hand, trading cryptocurrency assets has no similar fee requirement. Once you own crypto coins you are not bound to sell them by any arbitrary time, and it doesn’t cost you anything to keep them stored in your wallet.

Spreads and Liquidity

Traders who carry out several trades per day are probably better off trading crypto CFDs since these come with lower spreads than buying crypto assets. Spreads vary, sometimes significantly, between provider, so you must always shop around before proceeding with a purchase.

In terms of liquidity, trading crypto CFDs is considered better than crypto assets, especially if you’re trading less popular altcoins, such as Stellar. Since these coins are not commonly traded across many exchanges, you would probably need to use fiat currency to buy a popular coin first, such as Bitcoin. Next, you would need to find an exchange which allows you to trade Bitcoin for Stellar. The same process would need to be repeated when you come to liquidate your investment.

In contrast, trading Stellar CFDs allows you to buy and sell directly using fiat currency, without needing to carry out any additional exchanges.

Fees

payment methods

Fee structures vary considerably depending on the exchange or broker platform. When you’re trading crypto assets your primary fees relate to the cost of buying or selling the digital currency. However, your deposit or withdrawal methods can also affect the final cost of your trade, 

On the other hand, trading crypto CFDs includes a variety of possible fees, including commissions, overnight fees, inactivity fees, etc. Deposit and withdrawal fees might also apply, together with financing fees in order to borrow money to trade on margin.

Finding a platform which offers the right fee structure is important since fees which are too high can quickly erode any potential profits. Unlike most other platforms, eToro does not charge any deposit fees, and its withdrawal fee is set at $25 no matter the amount. The platform also removes overnight fees for high volume traders, making it an affordable and appealing broker to those wanting to buy crypto CFDs as well as crypto assets.

75% of retail CFD accounts lose money

Trading Time

Trading time applies to trading crypto CFDs since trading crypto assets has no time limit. Crypto CFDs trading times vary, but they do not generally exceed a few hours since positions should be closed by end of the day or sustain additional costs. This inability to hodl is one of the primary disadvantages of trading crypto CFDs.

Investments and Variety

What many don’t realise is that, in some cases, when you buy a cryptocurrency you are actually buying part of a company. Just like buying shares, buying enough cryptocurrency can affect its price and, potentially, the decision-making process of the company.

This reality only applies to secondary coins, which is why you won’t find crypto CFDs for such coins. As a result, the variety of crypto CFDs to choose from are normally limited to a handful, including Bitcoin, Ethereum, Litecoin, and a few others. On the hand, there are thousands of different cryptocurrencies which you can buy and trade on exchanges.

Both crypto CFDs and crypto assets can be viewed as investments, suitable for different types of traders. Understanding which type of investment is best for you might mean trying them both.

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