When you log-on to your current trading platform, do you know what you’re buying? Not all platforms actually provide you with real crypto. Instead, many issue you what is called a contract for difference, which equates to a version of a cryptocurrency that mimics its real market movements but is really nothing more than a promise. Before you go out and sign-up with just any crypto exchange, it’s important to be clear on what a contract for difference (CFD) is, how to tell if that’s what you’re being offered, and why true, verifiable ownership of your crypto is better and ideal. Below, we’ve prepared our analysis of CFDs vs. real crypto to illuminate all of those aspects and more! If that interests you, then read on!
What are CFDs?
CFDs, or contracts for difference, are bets on the future value of assets that don’t require you or even allow you to actually hold the assets involved. In that sense, they fall under the classification of “futures”. Typically, CFDs are used by individual and institutional investors to go long or short on assets, i.e., bet on them rising or falling, without being exposed to any risk other than general market movements.
What are CFDs in a crypto context?
CFDs, in a crypto context, fit the same definition above, except they usually allow anyone to trade in them. Many exchanges that provide CFD-based crypto trading allow their users to do so on leverage, which is dangerous, since it means trading on debt. To date, the most popular form of crypto CFD is likely an XBT contract, which tracks the price of a cryptocurrency like Bitcoin or Ether like an index fund would track the price of a specific group of companies.
Why exchanges offer CFDs and why traders use them
Crypto exchanges and even more traditional banks and brokers offer CFDs because in doing so, they don’t have to actually take on the risk of holding or “being the custodian” of any crypto. On the flip side, CFDs, like options, can be a helpful tool in any trader’s tool set because they allow you to make bets on both sides of a cryptocurrency’s possible movements and therefore, decrease your risk in the case of say, an unexpected bear market. Generally, these bets are usually classified as either “buy-side” or “sell side”, akin to either throwing your weight behind the crypto-asset involved rising or falling in the future.
After reading the above, it’s easy to wonder what, if anything, differentiates CFDs from options. Both are bets on whether an asset will rise or fall down the road. Foundationally, however, a CFD is like an IOU to potentially benefit from those movements, while an option carries the added benefit of also allowing you to buy the asset involved and a contract that actually expires. With a CFD, you can theoretically hold it as long as you wish.
Why not to choose CFDs
A CFD isn’t a cryptocurrency. As stated above, it’s a bet on its’ future price movements. So, when you buy Bitcoin via an exchange that offers CFD-based crypto trading, you don’t get any Bitcoin. You get a contract that’s settled whenever you sell it. For example, imagine you purchase a “long-CFD” (a buy-side bet) and at the time your CFD expires, your Bitcoin has gone up in value. In that case, you would receive your gains at the time you decide to sell your CFD. Some look at CFDS as an easy option for the masses to get into crypto, since they function like stocks and don’t require that investors get up to speed on how to store cryptocurrencies in a secure fashion.
While this is true, the risk of owning a CFD likely outweighs the benefits it brings.
Above all, it never gives you true ownership of any real-asset. Instead, the exchange or the broker involved can trade crypto, while you can’t and you’re left with nothing but a promise.
The fact is, however, you don’t have to settle for this! From the time that it launched, Bitcoin kicked off a new age in which everyone can finally own their assets and by extension, the cash value tied to them. In other words, Bitcoin proved and continues to prove that you truly can be your own bank. Buying real crypto instead of a CFD is only half of the equation, though. Once you do that, you also have to make sure you’re truly holding your crypto, which typically requires a hardware wallet, which is like a highly secure bank account that you and only you have access to at all times. Here at NBX, we support both of the leading hardware wallets, Trezor and Ledger, and with either choice, you can’t go wrong!
Above all, before you start trading crypto, make sure you’re actually receiving the assets you’re interested in and not just an IOU! Here at NBX, we keep it simple. Because we offer only pure unadulterated crypto, you can rest assured that when you become an NBX’er, you won’t have to worry about what you’re actually investing in. If that interests you, then sign up here.
This text is intended to inform and is not an investment recommendation.