Why MBX E-Commodities are better than Commodity CFDs

Published: September 28, 2020, Last Updated: January 31, 2022

A commodity contract for difference, more commonly known as commodity CFD, is an agreement between relevant parties that settles the difference between open and closing trade prices of the underlying commodity in terms of money. There is no delivery of physical goods in this contract and no intrinsic value lies in the CFD aside from an obligation to pay the difference in market prices.

Disadvantages Of Trading In Commodity CFDs

Ironically, the most important benefit of trading commodity CFDs can also be its most significant downside. The leverage that comes in with a contract for difference can wreak havoc on your trading capital.

But more importantly, CFDs come with a very large counter-party default risk. A ‘counterparty’ as the name implies is an entity or company on the other side of a financial transaction. When you buy or sell a CFD, the CFD provider acts as your counterparty. This is because a CFD is in essence a contract between the trader and the issuing CFD broker which means that the contract can only be closed out with the counterparty that issued the contract.

The degree of your counterparty default risk depends on how the derivative provider is hedging its exposures, the quality of its compliance procedures and its overall risk management. When any of these potential risk hazards translate into actual problems, investors cannot simply transfer their commodity CFDs to other parties. Even under good market conditions, inadequate risk management and clearing processes can still cause a provider to run into difficulties.

When you consider that even the largest of the financial institutions have gone bust in recent times, you have to think twice about counterparty risk and client money risks when trading CFDs with companies that are far smaller. The simple truth is that once you have funded your CFD account you become in most cases an unsecured creditor. In other words you have to rely on your CFD provider remaining in business.

Commodity CFDs vs. MBX E-Commodities

MBX E-Commodities are tokenized warehouse receipts that are managed through Blockchain technology. This allows us to effectively eliminate any shortcomings linked with the paper warehouse receipt system like difficulty in transacting and paper fraud (click here to learn more about the paper fraud problem of warehouse receipts). A warehouse receipt proves ownership of a given commodity that is stored in a vault, locker, or warehouse. Therefore, these receipts, whether paper-based or digital, can be used to trade the underlying assets and make the current holder of the receipts (or in the case of MBX E-Commodities tokens) the direct owner of the underlying commodities.

Holders of MBX Tokens are the direct owners of the underlying commodity and can take delivery of the assets at any time, regardless of the financial state of Blockchain Mercantile Company. Even if we go bankrupt, holders of MBX Tokens remain owners of their physical commodities which can be sold by the owner to any solvent party.

Furthermore, holders of MBX Tokens are not limited to trading their assets on our marketplace or on our blockchain and can choose to sell their tokens in off-market deals with buyers of their choice, or take delivery of their physical assets and sell these in physical markets.