Traders can invest in cryptocurrencies without owning the assets through instruments like Crypto CFDs. It allows exposure to various digital assets without the need for ownership, enhancing risk management strategies.
In this article, we will learn how one can invest in crypto without purchasing it.
Four ways to invest in crypto without buying it
Crypto CFDs (Contracts for Difference)
Crypto Contracts for Difference (CFDs) provide a way for investors to speculate on the price movements of cryptocurrencies without actually owning the digital assets. When entering into a CFD contract, investors agree with a broker to exchange the difference in the price of a cryptocurrency from the opening to the closing of the contract. This mechanism enables investors to potentially gain from both rising and falling markets. However, it is important to note that using leverage in CFD trading introduces a high level of risk, and investors can incur significant losses as well.
Crypto-related funds
Investing in crypto-related funds involves pooling money from multiple investors, which professionals then manage to allocate across various crypto assets or projects. These funds come in different forms, including hedge, mutual, and venture capital funds, all geared toward cryptocurrency. Investors can take advantage of diversification, as the fund managers make decisions on behalf of the collective pool of capital. While this method provides exposure to the overall growth of the crypto market, investors should be aware of management fees and the indirect nature of their exposure through the fund.
Cryptocurrency ETFs (Exchange-Traded Funds)
Cryptocurrency Exchange-Traded Funds (ETFs) are investment funds traded on traditional stock exchanges, designed to mirror the performance of specific cryptocurrencies or a basket of crypto assets. Investors can trade ETF shares on the stock market, offering liquidity and easy trading. ETFs provide diversification benefits, and their fees are often lower than actively managed funds. However, the value of an ETF is still subject to market risk, as it is tied to the performance of the underlying crypto assets. There may also be a risk of tracking error, where the ETF's performance deviates from the actual crypto prices.
Blockchain technology stocks
Investing in blockchain technology stocks involves purchasing shares in traditional companies that are actively involved in activities related to blockchain technology or cryptocurrencies. These companies may include those engaged in crypto mining, blockchain development, or providing services within the crypto industry.
However, the performance of these stocks may still be influenced by broader market trends, and the correlation with the crypto market may not be as direct as holding the digital assets themselves.
Advantages and risks of investing in crypto CFDs
Advantages
Hedging possibilities
Investors engaging in crypto CFDs can utilize these financial instruments for hedging purposes. For instance, if an investor holds a substantial amount of a specific cryptocurrency and wants to protect against potential market downturns, they can open a short position using CFDs. This strategic approach allows for managing and reducing overall risk within a cryptocurrency portfolio.
Market accessibility
Crypto CFDs provide traders convenient access to a broad spectrum of cryptocurrency markets without necessitating actual ownership of the underlying assets. This flexibility enables investors to speculate on the price movements of various cryptocurrencies, even those they might not want to hold in their long-term investment portfolio. The ability to trade on short-term price fluctuations enhances market accessibility and offers diverse trading opportunities.
No ownership of the underlying asset
When participating in crypto CFD trading, investors do not acquire actual ownership of the cryptocurrencies they are speculating on. Instead, they enter contractual agreements with brokers to exchange the price difference. This lack of ownership streamlines the trading process, reducing the need for storage solutions such as wallets, as investors are not required to hold the digital assets physically.
Tax efficiencies
Depending on local tax regulations, gains and losses from CFD trading may be treated differently than those from holding physical cryptocurrencies. In some jurisdictions, tax efficiencies may be associated with CFD trading, potentially resulting in a more favorable overall tax outcome for investors. Understanding and leveraging these tax implications can contribute to a more efficient investment strategy.
Risks
Counterparty risk
Engaging in CFD trading exposes investors to counterparty risk as they enter contractual broker agreements. Investors may incur financial losses if the broker faces insolvency or fails to fulfill its contractual obligations. To mitigate this risk, investors must select reputable and well-regulated brokers for CFD trading.
Fees and costs
CFD trading involves various fees such as spreads, overnight financing costs, and, in some cases, commissions. These costs can impact overall crypto gains; in certain situations, they may even exceed the gains from trading. Understanding the fee structure of the chosen broker is essential, as high fees can significantly affect the financial outcomes of CFD trading.
Margin calls
Using leverage in CFD trading allows investors to control larger positions with a smaller amount of capital. However, this also introduces the risk of margin calls. If losses accumulate rapidly, investors may be required to deposit additional funds to cover potential losses. Margin calls can lead to forced liquidation of positions, resulting in substantial financial losses.
Limited market hours
Crypto CFD markets often have limited trading hours compared to the 24/7 nature of the cryptocurrency market. During periods when CFD markets are closed, investors may face price gaps and increased volatility when the markets reopen. This limitation can impact the ability of investors to react swiftly to market developments, potentially leading to unexpected outcomes.
Diversifying trading portfolio with crypto CFDs
Trading cryptocurrencies without ownership via instruments like Crypto CFDs provide diversification advantages, empowering investors with exposure to digital assets while strategically managing risk in dynamic markets.
While investing in cryptocurrencies without actually owning the assets through instruments like Crypto CFDs offers several advantages, it comes with notable risks that traders should be aware of. Traders should carefully consider these risks and conduct thorough research before engaging in crypto CFD trading to make informed investment decisions.
