The era of global commerce given mankind several benefits. A more connected world ensures that the marketplace for goods and services is accessible and affordable. However, it has also spurred the proliferation of fakes, forgeries, counterfeits, and most importantly replicas. From watches to hand bags, brand name clothes, fine wine, art, and even cryptocurrencies, imitations are everywhere.
Cryptocurrency is no different. Imitations both far and wide have popped up in the space. Between cryptocurrency forks and new coins that are meant to closely resemble the characteristics of others with some small tweaks, there is no shortage of impersonators. However, the real imposter that has splashed into the cryptocurrency universe is none other than CFDs.
Tracing The Popularity Of CFDs
CFDs, short for Contracts for Difference, have risen to immense popularity over the last decade thanks to the growing attractiveness of online brokerage platforms. The contracts are unique in that they give investors the ability to gain exposure to certain assets and play both sides of the market, both long and short. Put more plainly, CFD investors can buy or sell a contract which mirrors the value of an actual asset without ever actually owning that asset. As a derivative contract, it simply derives its value from another tradeable financial instrument.
CFDs are extraordinarily popular not only for enabling investors to trade the market in either direction, but also because of the addition of leverage and removal of geographical restrictions. As such, it was only a matter of time before CFD brokers began adding cryptocurrencies to their offerings of commodities, futures, indices, bonds, and stocks. You can now find bitcoin CFDs, Ethereum CFDs, Ripple CFDs, and many more. Just like all CFD contracts though, investors in cryptocurrency CFDs never actually own the actual cryptocurrency they are purchasing.
The Advantages and Drawbacks of Cryptocurrency CFDs
Despite not trading actual cryptocurrencies when buying or selling CFD contracts for bitcoin, Ethereum, or Ripple, these assets aren’t completely impractical. In fact, for individuals speculating that the cryptocurrency market will continue to fall, CFDs offer an advantageous way to gain short exposure that is unavailable from most established cryptocurrency exchanges.
Furthermore, CFD brokers and market-makers often introduce margin trading to the equation, giving brokerage customers leverage to take larger positions. Nevertheless, for investors, this is a double-edged sword considering the rampant volatility in cryptocurrency. One swing in the wrong direction can wipe an entire account in seconds.
- Fast execution
- Ability to take short positions
- No actual legal ownership of cryptocurrency
- Leverage can also magnify losses
- Shuns blockchain and its benefits
- Omits the community aspect of blockchain
Execution is one area where CFDs are especially fast but interested scalpers should be wary that CFDs are typically accompanied by very wide spreads and higher transaction costs than those available from actual cryptocurrencies listed on established exchanges. This means higher costs for participation. There are two more sizable drawbacks though. The beauty of cryptocurrency is its decentralized nature and strength that is a function of participation.
CFD traders are not actually participating in the cryptocurrency economy or contributing any value to advancing the decentralized interests of blockchain. Buying a CFD does not enable a user to spend the underlying cryptocurrency, meaning that participation is symbolic at very best.
CFDs Are Still A (Cheap) Imitation
Although undoubtedly a good imitation, CFDs are just that, replications and reproductions. For serious blockchain enthusiasts and cryptocurrency investors, CFDs represent a bigger risk to the broader ecosystem than a measurable amount of adoption. While CFDs are certainly helping spread the idea of cryptocurrencies to a larger audience, they miss out on one of the most crucial aspects of blockchain by focusing investors on speculation: the community.
While greater adoption is the ultimate goal for cryptocurrency longevity, a purely speculative CFD product that cannot be used in the ecosystem does not serve blockchain’s greater good; it’s simply just an imitation and nothing more.