Bitcoin Spread Betting: Bitcoin Trading
Bitcoin has had its ups-and-downs in the few short years that it has been in existence. If you like to take risks, then it may be the spread bet that you have been looking for. You may have to look harder than usual, however, as not all spread betting providers are allowing bets on the volatile value.
For instance, IG started with a flourish earlier in the year, boasting that they would be the first brokerage to offer binary bets on bitcoin, only to pull the plug a few months later. One problem for spread betting providers is that bitcoin shows great volatility, and because of its virtual nature, the broker has to take trades onto its own account rather than laying them off onto the markets.
Bitcoin Spread Bet Example
Let’s take an example and assume Trader Jack wants to place a bitcoin spread bet. Bitcoin is traded on margin which means that trades are leveraged; and $1 bet per point on Bitcoin is equivalent to betting on 100 XBT. Let’s assume that bitcoin is currently trading at $700. A trader may see the bid prices quoted as 69,850 and the ask price listed as 70,150. The trader believes that the price of Bitcoin will continue rising so decides to go long (buy). He decided to place a bet of $10 on each point of price movement. A few weeks later the new ask price of bitcoin is 72,150 (which is a 2,000 point rise). The profit (or loss) would be calculated like this:
Profit or loss = (settlement price – opening price) x stake
In the above trade example, the profit the trader earns is:
Profit = (72,150 – 70,150) x $10 = $20,000
To try to understand the nature of bitcoin and why it is different from many other financial bets, you need to go back to its origins. The idea of bitcoin came about in 2008 in response to the global financial crisis. It was to present an alternative to fiat currency, that is most currencies, which are based purely on a government’s word. It has been many years since currencies were required to be backed by physical gold held in a vault.
Fiat currency has been criticized over the years, and even now with the US doing “quantitative easing” on a regular basis, you can see the production of money seemingly from thin air, which seems intuitively to be an inherently unsound practice. Some feel that bitcoin is the same as it also seems to “appear”. However, it is generated by virtual work and there is an absolute cap on the amount that can be in circulation.
The risky side of bitcoin is that it is not innately worth anything. It has recently run up to $340, but it could just as easily be $1000, $100,000, or $2.50. Many commentators are saying that bitcoin is in a bubble. For example, in April 2013 it rose from $30 to $260 in a month, crashing back below $70, demonstrating classic bubble behaviour.
Bitcoin has proved ideal for money laundering, and this has caused government intervention, which again affected the value of the bitcoin. There is no reason for the value to continue to rise, but then again, there is no specific reason for it to fall. It is the perfect speculative instrument, depending solely on what the market believes it should be at any particular time.
Proponents point out that bitcoin is not dependent on any particular marketplace, and is based on a worldwide-distributed network, which in itself means that no one can pull the plug on the operation. Another advantage is said to be that there is no “short pressure”, in other words speculators cannot sell bitcoins that they do not yet own. However, this refers to regular bitcoin trading as defined by its founders. The fact is, as you probably know, with spread betting you can bet on prices going down as well as up, and do so just as simply. This feature of spread betting is what places the spread betting providers in the awkward situation of being unable to lay off bets, and having to make their own market.
As a currency, bitcoin fluctuates too wildly to allow regular commerce. For instance, buying something for five bitcoins one day which may only be worth three bitcoins the next day can cause significant problems. But as bitcoins are not used extensively for commerce, at present this is not a difficulty.
If bitcoins are regarded as a speculation and more like a commodity, such as gold, then value analysis is easier, but the overall problem is trickier. Gold and therefore bitcoins could be thought of as a way of storing value. In this context, the current value at time of writing of all the bitcoins in circulation is $4 billion. However, as there is no physical substance or coin there is no guarantee that the value of a single bitcoin will not fall to one cent, undermining the stored value concept.
In the end, it comes down to how much you want to risk, and whether you feel that you can anticipate other speculators’ actions and hence the movement of the value. There is no doubt that fortunes may be made or lost trading with such volatility, so it comes down to a personal decision on how much you want to speculate.
Bitcoin CFD Brokers: Solvency Risk
The spread on the Bitcoin market is likely to be variable and fluctuating according to the present market volatility. Providers can’t easily hedge such contracts so they rely on their book to balance exposure; so say suppose they have 2000 clients that are long and another 4000 that are short of Bitcoin – the 2000 longs and 2000 short cancel each other out. If the market goes up, the longs make money while the shorts incur a loss. But what happens if the book is unbalanced as in this scenario? What happens if there are an extra 2000 that are short? They’re losing money but since there are no real trades happening on any exchange, when the shorts decide to close their deals at a loss, the broker gets that money.
But what happens in this situation if the market goes the opposite way (i.e. down)? There are an extra 2000 clients which are long and making money. This money will come from the provider’s bank account which is okay as long as the broker has a big buffer of cash which he can pay from. The problem is that this also introduces solvency risk and the bitcoin CFD broker may only have a limited amount of money on standby which may not be enough to pay all in a Black Swan scenario.
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