Contract for Difference (CFD)
A contract for difference (CFD) outlines a buyer’s obligation to pay any price difference that might occur due to the shifting valuation of an asset.
What Is a Contract for Difference (CFD)?
A contract for difference (CFD) is an important financial instrument that allows investors to protect themselves from serious fluctuations in the valuation of assets they are selling. In our modern economy, the prices of assets are quite volatile. In order to protect sellers from losing money during the documental preparations for a sale, buyers and sellers usually sign a contract for difference.
A CFD essentially ensures that the seller will receive payment for the value of the asset at the time of the agreement, even if the actual sale happens months after that because of documentary and administrative procedures. While all relevant documents are prepared, the price of this asset might decrease, thus robbing the seller of the initial gain they were expecting. Certificate for difference prevents sellers in such a scenario.
When signing a CFD, the buyer agrees to pay a set price for the asset regardless of any future fluctuations. In essence, the buyer agrees that they will cover any price difference between the amount agreed in the CFD and the actual price of the asset at the time of the sale.
As our financial world develops rapidly, CFDs entered the cryptocurrency
space. This is not at all surprising, considering the high level of volatility cryptocurrencies can go through on a daily basis. With a CFD, a crypto seller is guaranteed that they will receive payment for the agreed price, even if ten minutes later the value of the said crypto token
On the other hand, contracts for difference can turn out to be a very profitable investment mechanism as well. When signing a CFD the buyer and seller essentially agree on a price they are both happy with. However, if at the time of the sale the value for the given token increases, the buyer ends up buying cheaper tokens than the market price. In essence, he is already making a profit
, because of the CFD.
CFD in the Crypto Space
It is crucial to point out that CFDs in the crypto world carry a significant amount of risk
. Essentially, if the seller profits, the buyer has to pay more than the market price for a token. Conversely, if the buyer profits, the seller gets less than the market price for the tokens they are selling. In this sense, CDFs might be considered a perpetual
losing bet, depending on whose point of view you assume.