What Is a Crypto CFD and How Does it Work?

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  • PayPal’s forthcoming cryptocurrency platform will never see any actual cryptocurrency
  • The enterprise will be a contract for difference (CFD) model with everything conducted in dollars
  • What is a CFD and how does it work?

PayPal’s imminent cryptocurrency platform may have got many in the non-crypto world looking forward to a safe way to invest in the burgeoning cryptocurrency markets, but old timers have been more circumspect, and for a very good reason. PayPal will not offer the purchase and sale of actual cryptocurrencies but will instead offer a contract for difference (CFD), which sounds scary but is in fact a simple concept. So what is a CFD investment and why is it different from investing in actual cryptocurrency?

Introduction to CFDs

A CFD is what is known as a derivative, which means a product that derives from an asset – futures contracts are another example of a derivative. Each cryptocurrency purchase you make on the PayPal platform represents a contract with the company, a contract that terminates when you dispose of (sell or spend) the cryptocurrency.

With a cryptocurrency CFD you are not buying the actual cryptocurrency but are instead buying the right to earn any profit (or incur any loss) that derives from the price action of that asset. It’s essentially the same as placing a bet on the performance of the asset, except that you can choose when the bet closes.

The reason that the PayPal cryptocurrency won’t allow you to withdraw or deposit any cryptocurrency is because they won’t actually hold any – all transactions are conducted in dollars, mainly because PayPal doesn’t want the hassle of cryptocurrency custody and the associated risks.

PayPal Taking Sensible Approach to Crypto

A CFD investment approach makes sense for PayPal as it allows them exposure to a new market while minimizing the risks associated with it. The suggestion that you can ‘spend’ your cryptocurrency on their platform is something of a misnomer as you will never hold the crypto to begin with, but these details won’t bother the target market – and this, in turn, shouldn’t bother the old timers.