Crypto Options, ETFs and CFDs: what are the differences
Options, ETFs and CFDs are all trading terms applicable to stock market trading, so they have been around for a long time. But for this article, we explain their differences in cryptocurrency trading. Also important to remember that, unlike traditional markets, cryptocurrency markets are open 24/7. They don’t close over weekends or during public holidays.
CFDs and ETFs are financial instruments that enable you to speculate on the markets and trade accordingly. In comparison, options give you the right to buy or sell assets at a specific price. The decision to buy or sell can be based on options open interest trading volume, and the price of assets.
CFD (Contract for Difference)
A CFD is a contract for difference in which you agree to exchange the variation in the price of an asset from the opening position to the closing position. So you can buy a CFD based on whether you think an asset price will move upwards or sell if you think the price will go down. You can use CFDs to buy currencies, crypto and commodities. The advantage of using CFDs is that you have more control over what you think will give you better returns. Having this control will help you develop different strategies to maximize the potential to make great returns.
Crypto CFD trading doesn’t require capital and relatively small amounts to start, but you are responsible for paying any losses. CFD trading also provides access to overseas markets something at lower costs. CFD trading is also very risky and even more so with the crypto market, as cryptocurrency prices are already volatile.
An Option gives you the right to sell or buy an asset at a specific price. The right to buy is called a call option contract, and the put option contract gives you the right to sell. Options trading is bout buying and selling these contracts in an open market. Since no obligation is attached to these contracts, investors can minimize the risk.
That doesn’t mean there is no risk; with options trading, you are paid to take on someone else’s risk, or you are paying someone else to take on your risk. They also allow you to estimate the future price of a currency while mitigating your risk on investment.
Crypto options can be very costly due to the high volatility in crypto pricing. On the flip side, the earning potential can be very high because of the same price volatility. A trader once made a profit of $4 million back in 2020 due to the volatility of crypto pricing
ETF (Exchange Traded Fund)
An ETF owns shares in many companies, and it is an asset you can invest in, especially if you want to diversify your portfolio. Sometimes ETFs buy too much stock in a single company, and you can end up with a fluctuating portfolio. ETFs track the price of an asset (ETH or BTC), and they trade on exchanges. Like mutual funds, crypto EFTs can be sold and bought via a brokerage account.
Crypto ETF provides an affordable alternative for investors who wish to enter the crypto market. To illustrate this, in 2021, the price of Bitcoin started at $29 405.12 and rose to $35 045.00 at the end of June. At this time, the ETF price share for Canada’s Purpose Bitcoin ETF ranged from $10.09 to $6.44. A person who had made a substantial investment would have gained great returns.
The most valuable part of Cryptocurrency EFTs is that they allow you to trade in crypto without owning the currency. Not having ownership means you can avoid all the costs of owning the coins, such as annual digital wallet fees and custody charges.
More and more people want to trade in BTC ETFs and other cryptocurrencies, so much so that several firms across the US have applied to the SEC to list and trade Crypto ETFs on the US Exchanges.
- The difference between CFDs and Options is in the details of the contracts. With CFDs, you pay for the price variation at opening and closing. With an option, you buy or sell the right to trade an asset at a fixed price.
- ETFs are compiled by financial firms following a strategic process to hedge risk for their clients. Brokers offer CFDs so they can access private clients.
- CFDs are better suited for short-term investing, whereas ETFs are better suited for long-term investments. Because of the cost involved in keeping a CFD active for more extended periods, ETF, on the other hand, has a manageable annual fee and no ongoing interest fees.
Before making any cryptocurrency investment, arm yourself with knowledge. This is true for any investment; know what you are getting into. Choose the instrument that works best for your needs, your goals and your budget at the time. You can always change or diversify at a later stage when your finances have improved, or you have met your investing goals. Lastly, be diligent when looking for crypto investment options. There are many unscrupulous people on the web waiting to scam. If it sounds too good to be true, then it probably is.