The Fundamentals of Cryptocurrency CFDs

Contract for Difference trading, also known as CFD trading has been used in investment sectors that are older than the cryptocurrency industry. They have enabled people to invest in assets through contracts with brokers. Cryptocurrency CFDs offer an alternative to marking a position directly on a market.

CFDs in the Cryptocurrency Markets

With CFDs, a trader and broker agree to mirror market conditions in their contract, settling the difference between themselves when a position closes. Investors in cryptocurrency CFDs gain from certain advantages which are not enjoyed by users of conventional cryptocurrency exchanges.

A typical purchase of cryptocurrencies is carried out through a cryptocurrency exchange. A user makes a payment for the cryptocurrency using fiat or digital currency. Following their purchase, they may hold the coins for a period of time until it reaches a price level that they may deem adequate for the generation of profits. Cryptocurrency CFDs are a lot different.

Cryptocurrency CFDs allow for the trading of cryptocurrencies without actually owning any cryptocurrency. Investors in cryptocurrency CFDs make profits from correctly forecasting the future price of the digital asset. If a price goes down following a prediction of a price drop, an investor can make a profit.

Cryptocurrency CFDs vs. Crypto Assets

Although crypto CFDs may seem more complicated than purchasing and holding digital assets, they offer several advantages. One of such advantages includes the reduced security risks associated with trading cryptocurrency on an exchange. Cryptojacking and other methods used by cybercriminals have resulted in very high losses for investors on cryptocurrency exchanges. These costs can be avoided with cryptocurrency CFDs.

Many digital wallets, for now, are relatively complicated to use and require several steps to keep them safe. The chances of losing access to one’s wallet can increase. With added complexity of security features, risks of loss can increase. This depends on the knowledge of a user.

Unlike many exchanges, brokers are typically regulated which means that they are held to relatively higher regulatory standards than cryptocurrency exchanges. Many cryptocurrency exchanges are located in regions with lax cryptocurrency regulation or they operate completely remotely.

Unlike many exchanges, cryptocurrency CFDs offer users ways to profit from both rises in price value and falls in price value. For many, this reduces the risks of losses. However, others argue that there are still risks inherent in the investment method. While there may be potential for higher short-term rewards with cryptocurrency CFDs, the opportunities come with increased levels of risk which can be hard to manage.

Short Term or Long Term?

Short-term investors in Bitcoin may prefer CFDs due to the potentially higher returns it provides in the short-term when compared to the long-term returns expected from a long-term investment in digital tokens bought from an exchange. Money that is directly bought from an exchange is kept in a digital wallet.

Depending on where you live, CFDs can be quite tax efficient. This is one of the main reasons for why CFDs are so popular. They do not have stamp duty. However, capital gains taxes may need to be paid for CFDs. Consulting with a tax professional can make all the difference. They can help you decide how best to implement your tax strategy as it relates to cryptocurrency CFDs.

While not every broker will be willing to open up its doors to its users for a visit, there are several brokers that are more than happy to have their users over for informal due diligence. eToro is among the few brokers that ensures that users are kept in the loop of key changes that may affect how their investment in cryptocurrency CFDs turn out.

Flash Loans

A new concept has hit the cryptocurrency realm and it could present significant competition for cryptocurrency CFD brokers. Flash loans have been used in decentralised finance to take loans for investments without collateral. The concept seems quite crazy even when explained to significant lengths.

On January 8, 2020 Aave Protocol announced its mainnet on January 8 2020, which would include several features such as flash loans, the organization’s first implementation of unercollaterized loans.

An individual that seeks to take out a flash loan has to borrow Ethereum which can then be swapped for other cryptocurrencies which are used to make profit in sales before the loan is paid back using Ethereum.

One Transaction With Less Risks?

In only one transaction, all these actions can be carried out. Other cryptocurrencies such as DAI can be borrowed and invested in other ways. One may decide to borrow DAI in a flash loan and then pay back the loan before borrowing DAI at a lower rate on another platform. There are many ways in which the loans can be used.

A user may decide to borrow DAI in a flash loan to payback another loan which would free up collateral that could be used to make more profits from trades that may not have been possible without the collateral freed up. There are a growing number of organizations in the decentralised finance space that offer cross-chain functionalities, making it easier to carry out arbitrage in a safe way.

Like with most things, there is a catch to flash loans. Flash loans (for now) require the use of programming skills. Aaeve requires the use of solidity programming skills to be able to use its flash loans. Additionally, a significant amount of research has to be carried out into the best ways by which one can profit from the different investments that can be made using flash loans.

One investment decision is hard enough to make as it is. Making more than one investment decision with a flash loan can provide to be quite intense as one could essentially be handling thousands of dollars worth of cryptocurrency and also incurring costs at the same time.

Flash loans reduce the need to rely on traditional financial institutions for cryptocurrencies or fiat loans. Like CFDs, flash loans reduce the risks of holding cryptocurrency. For many people, this can be like a weight off their shoulders. However, there are many complexities associated with flash loans which require long periods of research to understand.

Originally published at https://morethanfinances.com.