What Are Crypto ETFs And CFDs?
Although there are differences between the cryptocurrency market and the traditional stock market, certain trading options and strategies have crossed the bridge from one form to the other. The most notable of these options are ETFs and CFDs.
Designed to offer an alternative to typical cryptocurrency trading techniques, ETFs and CFDs are a simple and effective way for newcomers and experienced traders alike to trade within the market without the pressures of actively owning a coin which is subject to the volatility. When it comes to newcomers to crypto, specifically, they have proven to be a good, solid starting point which can steady the ship in those first few months.
Why Are ETFs and CFDs Utilised?
As everyone knows by this point, the crypto market is volatile and fragile. One moment users could trade Bitcoin for prices up to $61,000, the next it has dropped by over 70%. The nature of the game is that the prices fluctuate and no day is ever the same.
With serious web developments like Ethereum’s merge and Web3 rearing its head, however, the lifespan of the cryptocurrency market still looks to be long and profitable. Only recently, experts predicted Bitcoin could be worth upwards of $100,000 by 2025, which is a considerable increase on the current bear market price.
ETFs and CFDs, then, are perfect for newcomers who are confident in crypto’s long term future, yet hesitant to involve themselves in the short-term effects of the market now.
But what are they and how do they work? Below is a brief run-down of both of them, as well as a few answers to the most prominent questions users have on their potential:
The Concept Of ETFs
In stock market terms, an ETF (which stands for “exchange-traded fund”) is an investment which acts just like a mutual fund. It is used to track a particular asset and can be purchased or sold in an exchange much in the same way that a regular stock can. For cryptocurrency, however, this concept has a few similarities and differences.
A crypto ETF is a mutual fund which consists of a variety of tokens, but unlike a traditional ETF, instead of tracking an asset or an index, it tracks the price of digital tokens. Due to cryptocurrencies relative volatility, investor sales and trades are constantly fluctuating, which means the price of cryptocurrency fluctuates with them. The share price of ETF, then, runs in tandem with the changing prices in the market.
As mentioned previously, there are many benefits to owning an ETF, especially for those who are inexperienced with the market. One of the largest benefits is that it allows newcomers to be exposed to cryptocurrency without the expenses and risks which comes with actual, physical ownership.
They are also affordable alternatives for anyone who is unable to open the door to the market in the first place. Cryptocurrency is experiencing a bit of a winter at the moment, but when the prices go up, so too will the competition. Soon, anyone looking to buy and trade Ether or Bitcoin will have to have a considerable amount in their portfolio in order to afford new assets. An ETF, however, can allow investors to put just a little of their money into an asset class and see significant gains depending on how much the market swells.
The Concept Of CFDs
CFDs (which stands for “contract for difference”) are another trading option that many users are beginning to adopt within the crypto market.
In traditional stock market terms, a CFD is ordinarily offered as a stock, index or any other asset by a broker. The trader and the broker engage in a contract which stipulates that the buyer must pay the broker the difference between the value of an asset at any current time and its value during the time the contract was made. Once again, this allows traders to profit from price movements without outwardly owning the assets themselves.
Unlike ETFs, the differences between traditional CFDs and cryptocurrency CFDs are few and far between. In both cases, a contract is assigned through a broker and traded on price movements, meaning there is potential for returns whether the price is going up or the price is going down. There are a number of benefits, too. First off, a crypto CFD can be traded using leverage, which means a small amount of capital could still lead to an exponentially higher trade value (for instance, if you have $1,000 in your trade account with a leverage of 100:1, you could open trades to as much as $100,000).
You also have the benefit of choosing the asset that you trade, which can give you far more control over the strategies that will work best for CFD trading. As always, though, it is important to bear in mind that cryptocurrency prices are volatile, which makes them very difficult to predict. In this way, pouring a lot of money into a CFD contract can be counterintuitive and lead to more losses than actual returns.
FAQs
Are CFDs More Profitable Than ETFs?
The question of which is more profitable is entirely down to your own circumstances and how you would use them. Both an ETF and a CFD are good options for those who are not looking to actively own assets, but they are different in the way they operate, both in their risks and their reward.
Do They Only Work On Bitcoin’s Blockchain?
Both ETFs and CFDs are possible to attain inside any blockchain, whether it’s Bitcoin, Ethereum, or any other network you choose.
Are There Risks To Either Of Them?
There is always a risk to any cryptocurrency strategies, which means there are risks to CFDs and ETFs too. But, having said that, the small amount of capital you can put into them can help to avoid your finances being badly damaged if things go wrong. This is why they are a good option for those who are hesitant about the market.
Is It Worth Getting Involved During The Crypto Winter?
As mentioned previously, the crypto landscape is a bear market at the moment, but that doesn’t mean you shouldn’t get involved. Short-term rewards will be smaller, but there are plenty of opportunities to make profit, and it will not be long until crypto is back to its former glory again.