Price exposure vs. true ownership: is the Bitcoin in your wallet actually yours?
Buying your first piece of Bitcoin is an exciting moment.
You set up an account with a seemingly reputable exchange, connect your payment method of choice and make your very first purchase.
Then you sit back and look at the value in your wallet — delighted to finally be a part of the cryptocurrency revolution.
But there’s a hitch.
You might not actually own the Bitcoin you just bought.
Those numbers in your wallet may not reflect underlying ownership. If you’ve brought Bitcoin from some of the popular exchanges, you may have been misled into buying a CFD or some kind of ‘derivative product’ that gives you ‘exposure to the price of Bitcoin’… but not actual Bitcoin ownership.
What’s a CFD?
Simply put, a CFD is a contract between two parties, one of whom wants to sell an asset and one of whom wants to buy it.
But ‘buy’ and ‘sell’ are misleading because the asset doesn’t actually change hands.
Instead, the buyer purchases exposure to the asset at its current price. If the asset changes in price, the seller pays the buyer the difference.
That’s what CFD stands for – contract for difference. If the price of the asset decreases, the buyer ends up paying the seller.
There are lots of different types of CFDs. In the cryptocurrency world, buying a CFD gives you exposure to the price of Bitcoin (or another cryptocurrency like Ethereum and Litecoin.) If you decide to sell and the price has gone up, you receive the difference, minus fees. If you decide to sell and the price has gone down, you pay the difference.
What’s the difference between price exposure and true ownership?
Some cryptocurrency wallets don’t actually give you ownership of the Bitcoin you pay for. This means you can’t move your Bitcoin out of your wallet. All you can do is hold, sell or transfer it to other users. Most importantly, there’s no way to spend it – because you don’t own it. Plus, you’ll probably end up paying for the privilege.
If there’s a security issue, for instance, you can’t transfer your balance to a different wallet.
Your only option is to sell, then withdraw the money and buy again. Users have reported paying fees as high as 6% in the process. Numerous people have also reported having their accounts closed and losing their money with no way of getting it back.
This is a mistake many newbie Bitcoin investors make.
Sure, some of these wallet providers do tell you that you’re buying price exposure and don’t claim to give full ownership.
But with so much new jargon floating around, new investors may misunderstand what that means. Unless you have experience investing, you probably don’t know the difference between exposure and ownership.
That’s another reason why it’s vital to always DYOR (do your own research.) Dive into your wallet provider’s small print, and you might just find you don’t really own your crypto.
