Whether you’re an online investor just beginning to explore cryptocurrencies as an asset class or a blockchain expert new to trading, deciding where to put your money can lead to questions. Are you better off investing directly in Bitcoin or Ethereum? Or would your interests be best served by contracts for difference (CFDs) that follow the fast-moving markets?
The main differences between Crypto and Crypto CFDs
Before making a decision it may help to distinguish between investing in crypto and investing in a crypto contract for difference (CFD). While obviously related, they’re very different financial instruments, and understanding the difference can clarify the best use of your money and the best online brokerage for you.
Justin Grossbard of CompareForexBrokers.com explains:
“The first step in retail investing, whether it’s crypto or crypto CFDs or some other asset, is choosing the right broker. And that means a licensed and regulated broker approved to operate wherever you live”.
Investing through a licensed broker ensures not only that you’re actually accessing the market, but offers your investment some protection.
Investing in cryptocurrency means exactly that you use your local fiat currency to purchase an equivalent amount of cryptocurrency, such as Bitcoin, Tether or Solana that you then store in a secure digital wallet.
Because you now own actual cryptocurrency, you’re able to purchase tokens, NFTs and other virtual assets, as well as items in the real world. If you choose to sell your crypto coins, you can profit from an increase in their value against the purchase price you paid.
Crypto CFDs, how do they work?
When you invest in crypto CFDs, however, you never actually purchase any crypto coins or tokens. Instead, you enter into an agreement with a financial institution to exchange the difference in value in a given cryptocurrency within a specific time period.
Basically, an investor and a brokerage bet one another that the crypto market will move in a certain direction and, at a set date, whoever predicted correctly receives a payout from the other worth the value of the difference between old and new pricing.
While trading directly in crypto has the obvious advantage of providing all the benefits of blockchain technology, such as security, flexibility and scalability for a variety of transactions, it’s not without drawbacks. The best-known and most secure cryptocurrencies can be expensive – right now, one ETH is worth about 1,850 EUR, and that’s after a significant drop in value.
The characteristics of the crypto market
Which brings us to another possible disadvantage: crypto markets fluctuate rapidly, gaining and losing value quickly. If you’re not committed to the web3 vision or an inexperienced investor, it can be difficult to weather the ups and downs of this volatile market.
Trading in CFDs, on the other hand, allows you to profit from just this volatility without taking on the risk of owning any actual cryptocurrency. You might see the same precipitous decline in ETH’s value differently, for example, if you had correctly predicted the market movement and opened the appropriate positions.
Understanding what position to take, however, requires a degree of patience and persistence, together with a willingness to learn sometimes complex trading strategies.
Investing in either cryptocurrencies or CFDs can pose some regulatory challenges. Certain jurisdictions, such as the United States, only recently legalized cryptocurrencies and don’t permit trading in CFDs of any kind. Other countries and financial markets take a more open approach, but it’s important to do your research before beginning live trading.
In sum, investing directly in cryptocurrency offers you the opportunity to participate in the broader blockchain movement. Trading in CFDs, on the other hand, has the advantage of possible profits even if cryptocurrencies themselves lose value. Regardless of which investment works best for you, always execute your transactions through a licensed broker in your country of residence.
*This article has been paid. The Cryptonomist didn’t write the article nor has tested the platform.