Brief history

A paper called Bitcoin — A “Peer-to-Peer” Electronic Cash System was published in October 31, 2008 by a software developer under the pseudonym Satoshi Nakamoto. The result was a new type of currency, Bitcoin, which is independent from central authorities and almost instantly transferable with low transaction fees.

So far, the most popular and largest cryptocurrency, Bitcoin, reached a record-breaking valuation of around $20,000 in December of last year. In addition to Bitcoin, several hundred alternative cryptocurrencies known as altcoins have since entered the market such as Ethereum, Ripple, Litecoin, and many more. Due to the growing popularity of cryptocurrencies, more and more investors and traders are buying cryptocurrencies today.

However, there are many people who are confused by investing in cryptocurrencies thorough Contract-for-Difference (CFD) transactions. In order to avoid any misunderstandings, I have highlighted the key differences between transactions on CFDs versus direct investments in cryptocurrencies.

What are CFDs?

Before we take a look at the key differences between the two concepts, let’s first look at the definition of CFD. CFD means Contract for Difference and is a financial instrument. CFD is a type of derivative in which one of the parties undertakes to pay the second difference between the value of the security at the beginning of the contract and its value at the end of the contract period. CFDs are a useful tool to hedge risks on stock exchanges and arbitrage. Simply put, CFDs are nothing less than exchange rate differences. If an investor believes that the price of gold will increase they will buy a CFD contract in the hopes that the value increases and if he is right, he will make money. If the price falls however he will lose money.

CFDs are financial derivatives which are conducted as agreements between a trader and a brokerage company. When we have a contract, we do not actually own the underlying asset, instead, we possess the right to receive the difference between the current value of an asset and its value in the future.

What are CFD contracts for cryptocurrencies?

Trading CFDs on cryptocurrencies means trading based on market prices of cryptocurrencies. Although, you do not become a physical holder of cryptocurrencies, you can still invest and generate profits or losses based on changes in the cryptocurrencies price.

The main difference between investing directly in cryptocurrencies and CFDs are listed in the table below: