Crypto CFDs: A Powerful Tool for Institutional Traders

What are CFDs?

A CFD is a cash-settled derivative contract between an investor and a dealer to exchange the difference in the price of a cryptocurrency between the time the contract is opened and when it is closed. A CFD investor never owns the underlying asset but settles profit or loss at the time of closing position based on the price change of that asset. While CFDs are not available to trade in the US, they enjoy an active market in other jurisdictions.

Key benefits of crypto CFDs 

By leveraging the unique features of CFDs, institutions can manage their market exposure, hedge risks, and optimize their investment strategies. The following are some of the benefits that make crypto CFDs an attractive option for institutional investors.

• Capital efficiency. One of the key advantages of CFDs is the ability to use leverage, allowing traders to gain larger exposure to the crypto market than their capital would be able to purchase outright. For institutional investors, this feature may be particularly attractive when aiming to maximize potential returns on small price movements or for hedging large positions without committing substantial capital. 
• Ease. CFDs offer exposure to cryptocurrencies without the operational burden of securing and managing digital wallets, onboarding with exchanges or converting crypto assets to and from fiat. 

• Flexibility. CFDs are highly flexible. Investors can easily speculate on both rising (going long) and falling (going short) markets, allowing them to adapt to market conditions quickly. This flexibility allows institutions to manage their risk exposure effectively.
• Security. Trading CFDs directly with a reputable dealer bypasses the risks associated with security hacks at an exchange or with handling keys and custody infrastructure. 
• Cost efficiency. Since CFDs don’t involve the physical transfer or storage of digital assets, they avoid the operational costs of handling cryptocurrency wallets. 

Risk considerations for crypto CFDs

While crypto CFDs offer numerous benefits, as with any leveraged instrument, they also come with risks. Below are some of the common risk considerations when trading crypto CFDs.

• Volatility risk. Cryptocurrencies are volatile, with significant price swings that can occur in a short timespan. While leverage can magnify gains, it can also magnify losses in a highly volatile market, which can lead to substantial financial exposure if not managed correctly.  An unexpected increase in margin requirements as a result of market conditions can result in liquidity issues, interest charges and forced liquidations.
• Regulatory risk. The regulatory status of crypto CFDs varies globally. Some jurisdictions have embraced the regulation of CFDs, while others have imposed restrictions or outright bans on trading them (e.g., CFDs are not permitted in the US). Institutions must ensure compliance with local and international regulations when trading crypto CFDs and choose reputable platforms that operate transparently to help mitigate legal and financial risks.
• Counterparty risk. CFDs are typically offered by dealers, making them dependent on the counterparty's solvency. In the event a dealer becomes insolvent, there is a risk that an investor could lose all of its funds. It’s crucial for institutions to choose a reputable dealer with strong financial standing to help minimize this risk.

Use cases for crypto CFDs in institutional trading

Crypto CFDs can be a versatile tool in supporting a range of institutional objectives. Here are some of the most common use cases for crypto CFDs among institutions.

• Diversification. By using CFDs, institutions may diversify their portfolios without needing to directly hold multiple crypto assets or manage multiple crypto wallets. This can be particularly useful for institutions seeking exposure to newer, more volatile tokens without incurring the risks and costs of direct ownership.
• Speculation. Crypto CFDs also offer opportunities for speculative strategies. Institutions may use CFDs to take positions in volatile markets, betting on short-term price movements without committing large amounts of capital. The flexibility of CFDs permits investors to easily speculate on both rising (going long) and falling (going short) markets.
• Hedging. For institutions already holding significant crypto assets, CFDs could provide a way to hedge against market downturns. For example, if a fund holds a long position in bitcoin, it could take a short position through a CFD to offset potential losses if the price declines. 

Crypto CFDs vs. perpetual swaps

CFDs and perpetual swaps are both derivatives used to gain exposure to cryptocurrencies without having to own the underlying assets. However, they differ in structure and trading mechanics:

• A CFD is typically a non-standard contract between the investor and a dealer with or without an expiration date; whereas a perpetual swap is a standard contract typically traded peer-to-peer on an exchange with no expiration date.
• Perpetual swaps rely on a funding rate mechanism, whereby value is exchanged between long and short traders periodically; whereas with CFDs, the difference in value is exchanged upon closing the position, and a trader may pay overnight or rolling fees while they hold the position.

When choosing between the two instruments, institutional traders should consider regulatory standing. In the US, where CFDs are not permitted, investors may instead choose to trade perpetual swaps, if available. 

How Talos supports OTC derivatives

The Talos Trading Platform offers certain non-US clients the ability to trade CFDs through an integration with reputable OTC dealers such as Wintermute and B2C2. We also support the ability for certain clients to trade and manage perpetual swaps on our platform through an integration with a number of the leading exchanges that offer them. We recently added support for Route28, the synthetic prime brokerage offering from Hidden Road providing OTC swaps across all major asset classes. In the future, we plan to continue expanding support for OTC derivatives trading. 

Contact us to learn more about how Talos can support your digital asset trading strategies. 

^{Disclaimer: Talos Global, Inc. and its affiliates (“Talos”) offer software-as-a-service products that provide connectivity tools for institutional clients. Talos does not provide clients with any pre-negotiated arrangements with liquidity providers or other parties. Clients are required to independently negotiate arrangements with liquidity providers and other parties bilaterally. Talos is not party to any of these arrangements. Services and venues may not be available in all jurisdictions. For information about which services are available in your jurisdiction, please reach out to your sales representative. Talos is not is not an investment advisor or broker/dealer. This document and information do not constitute an offer to buy or sell, or a promotion or recommendation of, any digital asset, security, derivative, commodity, financial instrument or product or trading strategy. This document and information are not intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. This document and information are subject to change without notice. It is provided only for general informational, illustrative, and/or marketing purposes, or in connection with exploratory conversations with institutional investors and is not intended for retail clients. The information provided was obtained from sources believed to be reliable at the time of preparation, however Talos makes no representation as to its accuracy, suitability, non-infringement of third-party rights, or otherwise. Talos disclaims all liability, expenses, or costs arising from or connected with the information provided.}