CFDs and tokenised assets are popular tools for traders. The mechanisms they use to achieve this are fundamentally different, and it’s important for traders to know how each works to determine which they should use in their own trading strategy. Here’s a comparison between CFD and tokenised assets trading so you can decide which one to use.
What Are CFDs and How Do They Work?
CFDs stands for ‘contracts for differences’. A CFD is a simple but powerful trading instrument that allows you to bet on the price movements of underlying assets you may not normally have access to. CFDs also allow you to use leverage in your trading so you can use the trading capital you have very efficiently. However, they also come with unique risks, too.
Contracts for differences are opened between a buyer and a seller, who agree that the buyer will be paid the difference in price between the current price of an asset and the price of the asset at a date in the future.
When the CFD contract closes, the buyer will earn a profit if the price goes up, and the seller will lose money. But, if the price goes down, the seller earns a profit and the buyer loses money.
How to Trade CFDs?
With the right trading platform, trading CFDs is a simple process. You need to pick the asset you want to trade (stock, currency, token, etc) and then choose your position. If you think that the underlying asset will go up in value, you’ll want to buy a CFD to open a long position. If you think the value will go down, you want to sell a CFD to open a short position.
Opening a Long Position
If you open a long position, it means the seller has to pay you the difference between the price of the asset when you open the position and the price of the asset when you close the position. If the price goes up, that difference will be positive and you’ll earn money.
To buy a CFD that someone else is selling, simply open the market in your trading platform and buy one of the available positions offered by sellers.
Opening a Short Position
If you think the value of the asset will go down, open a short position to sell a CFD. This means you’ll propose the contract for someone else to buy. If the price goes down, the difference in price between the opening of the contract and the closing will be negative, and the buyer will have to pay you to close the position. To sell a CFD, you’ll need to create and offer the contract on your trading platform.
Benefits of CFD Trading
There are many benefits of trading CFDs. The most important ones for newer traders are:
- The ability to open deals for both buy and sell;
- no hidden fees;
- no need to own the underlying trading asset;
- the ability to open positions on expensive trading instruments without needing enough capital to buy the whole instrument;
- access to a large number of assets through one trading account with online CFD trading;
- the possibility of increased profits with leverage.
These benefits make CFDs some of the most flexible instruments. But, you also need to be careful with the risks that come with them.
What Are Tokenised Assets and How to Trade Them?
Tokenised assets are a blend of the traditional world of asset trading with the new world of cryptocurrency. Traditional assets are traded by purchasing and selling the physical asset or a contract signifying some form of ownership of the underlying asset. This type of trading usually needs to be done through a broker to ensure contracts are properly managed.
Tokenised assets make this process more accessible and efficient by having underlying assets (such as stocks, gold or currency) represented by a crypto token. Tokensation helps you get access to stock trading, bitcoin trading, commodity trading, or index trading. Real estate, private equities and physical goods can all be bought and sold on the blockchain in the form of crypto tokens.
This allows much easier trading of these goods for retail traders, especially those outside the United States. As long as your cryptocurrency exchange has access to these tokens, you can trade them as you like from anywhere in the world. It also allows for 24/7 trading of many assets, which is not possible on stock markets.
There are downsides to tokenised asset trading. The main one is trust in the asset issuer. If the issuer of the asset breaks its obligation to back each of the tokens with its corresponding real asset, you could lose money. This is called counterparty risk. In traditional investing, there are robust legal processes to protect investors. These may not exist with tokenised assets.
Comparison of a CFD Trade and a Tokenised Assets Trade
Making a CFD trade means purchasing a contract on a CFD market (like a trading app) to open a long or short position, then closing the position to take profit or losses. This is different from a tokenised asset trade where you purchase the token for the underlying asset and store it for sale later – either in your exchange wallet or in your own storage.
CFDs and tokenised assets have certain features in common. They allow you to trade an asset indirectly without owning the actual asset in full. You can do almost any kind of trading you like, with long and short positions and trade 24/7 from anywhere in the world.
However, they also share downsides, too. Both with CFDs and tokenised assets, you do not have any shareholder rights, and there are counterparty risks.
CFDs are currently very popular outside the US, but tokenised assets are gaining on them fast as they offer more efficient and flexible products using blockchain technology. Some predict that tokenised asset trading may cause the demise of CFD trading.
However, this movement from CFDs to tokenised assets could also introduce more risk and instability to the markets. Trading regulations such as those restricting CFD trading in the US are designed to protect the market from the vulnerability caused by inexperienced investors. It’s not clear how these safeguards would work in a world of global tokenised asset trading.
CFDs and tokenised assets are both flexible options for traders looking to trade a variety of traditional assets. If you’re outside the US and uncertain about the cryptocurrency industry and the ability of token issuers to fulfil their obligations, then CFDs are a good way to indirectly trade different markets.
However, if you’re already into cryptocurrencies and are willing to accept some counterparty risk, then tokenised asset trading is the way of the future. Either way, make sure you incorporate the risks of each into your trading strategy.