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What is the difference between buying Bitcoin on a cryptocurrency exchange and trading in BTC CFDs?

November 7, 2020 - new, Reviews - , ,

Investing in cryptocurrencies is very risky for investors. The valuation virtual currencies such as Bitcoin changes very dynamically, so one moment you can make a fortune only to lose all your savings later. This happened to the people who invested in the most popular cryptocurrency in the world – Bitcoin – at the end of 2017: at the beginning of 2018 it turned out that its value went down grossly. Investing in cryptocurrencies is, nevertheless, becoming a more and more attractive form of earning. It can be done by participating in cryptocurrency exchanges or trading in Bitcoin CFDs. How does it work?

What is Bitcoin anyway?

Lots of things are being said cryptocurrencies, especially about Bitcoin, but it is not true that they are a virtual counterpart of the national currency. Cryptocurrencies have a totally different nature. Bitcoin is a cryptocurrency, a “peer-to-peer electronic cash” system to be exact. It is based on the blockchain technology, i.e. block chains, which it uses to secure transactions. It involves carrying out digitalised processes that verify, save and confirm transactions with complex cryptographic mechanisms. 

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It is worth noting that Bitcoin is currently the most popular and the most expensive cryptocurrency in the world. The number of Bitcoins that can be “mined” is limited. So far, about 17 thousand pieces of that cryptocurrency have appeared on the market. Bitcoin was valuated at more than 20 thousand dollars in December 2017.

How to invest in Bitcoin?

There are two basic ways of investing in cryptocurrencies. In the case of Bitcoin, it will be first and foremost investments in cryptocurrency exchanges or investments in Bitcoin CFDs.

Cryptocurrency exchanges allow to purchase Bitcoin directly. The investor thus becomes the owner of a given number of Bitcoins. They have to deposit the capital in an individual account kept at the cryptocurrency exchange platform. However, what poses problems is the fact that the exchange may be attacked by hackers and the cryptocurrencies may be irreversibly stolen and lost.

There is another possibility of investing in cryptocurrencies – CFDs, or contracts for exchange rate difference. They are financial instruments, a sort of trading in derivatives, where the parties bet with each other what the value of a given instrument will be in the future. In the case of Bitcoin CFDs, one party agrees to pay the other the difference between the initial and final value of the contract if the assumptions as to the price of the underlying instrument, i.e. Bitcoin, turn out to be true.

In practice, an investor uses a Bitcoin CFD and assumes that the Bitcoin price will go up. They can then conclude a CFD with a broker (eg. XTB Online Trading) and if the BTC value actually grows, the investor will make money, but if the price goes down – they will incur a loss. As part of a CFD, an investor can “bet” that the Bitcoin price will go down and conclude such a contract with a broker. Therefore, it is said that thanks to contracts investors can make money not only on increases, but also on decreases in the Bitcoin price.

Advantages and disadvantages of investing in Bitcoins on exchanges and with CFDs

When investing in Bitcoin on cryptocurrency exchanges, the bought tokens are stored in digital wallets. They can be accessed easily, so the risk losing the value goes up. The liquidity of such investments is limited by cryptocurrency exchanges.

In the case of CFDs, assets are intangible, which amplifies investment safety, often guaranteed by brokers, whose activity is subject to regulations of financial supervisory authorities (more info about CFD trading). Physically, a person investing in Bitcoin CFDs does not possess the cryptocurrency. As a result, they trade not in the cryptocurrency per se but on price variations and they can freely move around different markets.

Cryptocurrencies can be freely sold, exchanged or used to make payments on virtual exchanges. On the other hand Bitcoin CFDs cannot be used to make purchases. The investor can trade in them only on cryptocurrency price variations.

The strength of CFDs is the fact that trading in them is offered by regulated entities which protect the interests of their clients. Trading in the contracts is much safer than investments in Bitcoin on cryptocurrency exchanges.

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