WHAT ARE CRYPTO CFDs AND ETFs: ARE CRYPTO DERIVATIVES THE FUTURE?

WHAT ARE CRYPTO CFDs AND ETFs:

The bull run that started in 2020 was fueled in part by institutional investors who gained unprecedented exposure to the market. However, they are using a more sophisticated approach than retail traders. What are crypto CFDs and ETFs, how do they work and why do they matter? Find the answers to these questions in our new article.

What are Crypto CFDs?

Source: FXSSI

Essentially, traders make bets whether the price of an underlying asset will rise or fall. If they believe the price will go up, they open a buy position, and vice versa.

What are crypto CFDs? These are contracts to trade cryptocurrencies as an asset participating in the CFD. In this case, crypto CFD meaning would be betting on a movement of a crypto/crypto or crypto/fiat pair.

How does Crypto CFD work?

A month later BTC is trading at $75,000, and Alice exits the position with a profit of $18,750 in total. The CDF is cash-settled, the initial position of $25,000 and the closing position of $37,500 are netted out. The gain of $18,750 is credited to Alice.

Where to Trade Crypto CFDs?

Crypto CFD Advantages and disadvantages

Crypto CFD Pros

  • Moreover, in a CFD you do not actually have to buy cryptocurrency at all. No problems with exchanges, transfers and keeping the digital coins.
  • Flexibility. With CFDs traders can go both long and short, while it is not always possible with spot trading.

Crypto CFD Cons

  • Not actually owning a cryptocurrency can also be seen as a minus. Holding strategy won’t work here, as CDFs are only suitable for trading.
  • Not all pairs and coins are supported by brokers.

What are Crypto ETFs?

Source: justETF

An ETF, which stands for “exchange traded fund”, is a derivative asset which tracks a selection of assets but can be traded like an independent asset. For example, SPDR S&P 500 (SPY) is an ETF which tracks the S&P 500 index (index of top-500 exchange-traded American companies). An index itself is only a metric but with a derivative like an ETF, it can be traded on an exchange.

ETF is usually a basket of assets that is managed by an authorized provider (AP). In the case with cryptocurrencies, APs take care of custody and managing digital assets.

What are the Bitcoin ETFs?

Is there an ETF for Cryptocurrency?

Crypto ETF Advantages and Disadvantages

Crypto ETF Pros

  • Crypto ETF allows traders to short sell, which is near impossible with an actual asset on hands.

Crypto ETF Cons

  • Authorized providers require fees for managing the underlying asset
  • Requires authorized participants means the selection of brokers is limited

Differences between Crypto CFD and ETF

In fact, these two are completely different things: an ETF is a derivative and a CDF is a contract. CFDs can actually be used to trade ETFs! An ETF also has to be approved by a regulator while CFD trading is done on an OTC basis by many brokers.

What do CFDs and ETFs mean to crypto?

On the one hand, being included in exchange-traded products and contracts gives legitimacy to digital currencies. These derivatives are more closely regulated and give exposure to assets to investors who don’t want to handle risks themselves.

On the other hand, treating digital currencies like assets to back derivatives leads to commodification. Bitcoin was meant to be owned and used for transactions. Now it has become an asset class which is lauded for the ability to accumulate value due to its immutable scarcity.

Conclusion

So what are crypto CFDs and ETFs? Now you know! Want to know more? Then read more articles from our blog. For content on the go, sign up for our updates in Twitter, Reddit, Facebook and Telegram

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