Trading Bitcoin Contracts for Difference (CFDs)

Bitcoin is one of the newer commodities that can be traded with CFDs. Bitcoin is a crypto-currency that has value since it practically eliminates transaction fees when sending money globally and has a fixed supply of 21 million Bitcoin. It is a currency that is decentralized, allowing transactions between two parties without governments or a third party. The forces of demand and supply determine the price of Bitcoin on exchanges and this financial instrument has been gaining popularity among traders due to its volatile nature. New bitcoins are created with highly time-intensive algorithms which limits the rate they enter the market, while demand is affected by various factors, such as confidence in the central banking system, merchant adoption and the perception of Bitcoin as a store of value. Since there is a fixed supply, it is a finite commodity similar to gold or oil.

Bitcoin is quoted against all major currencies, but the most popular pairs are the BTC-USD and BTC-CNY, representing the US Dollar and Chinese Yuan rates. Most exchanges use these rates. Volumes are a lot lower in Bitcoin markets as compared to other financial markets. So large, significant buy or sell orders can move the market considerably.

Bitcoin is legal in the UK and the government has adapted a wait-and-see approach to regulation. The UK tax department, the HMRC, did not explicitly recognize bitcoin as a currency. Its approach treats it like any other means of payment for tax purposes. Value Added Tax will be due in the normal way from suppliers of goods and services sold in exchange for bitcoin or other crypto-currencies. Recently, the Chancellor of the UK announced a new initiative to explore the risks and benefits posed by crypto-currencies. The results could see a shift towards a new regulatory framework for Bitcoin in the UK.

Trading Bitcoins

You have no doubt heard about bitcoin – it's a so-called 'crypto-currency', or an electronic currency with no actual coins or notes. The idea is that it's very efficient at sending money globally, and circumvents usual currency problems. There are a limited number of bitcoins available, and they are traded on a peer to peer network, with every transaction recorded in a public ledger called the block chain.

As a crypto-currency, bitcoin is designed with many safeguards to avoid any possibility of counterfeiting. By its nature, it avoids many restrictions applying to conventional currency in transactions around the world. This incidentally is why it has gained a reputation as being used for money laundering and illicit activities.

Because it's unconventional, bitcoin trading has been characterized by volatility, with early investors making and losing fortunes. This has made many people fear investing directly in bitcoins. However, traders usually seek out volatility as it can spell profits. This means that for the last couple of years several online brokers have offered CFDs (contracts for difference) based on bitcoins.

Trading Bitcoins CFDs

Bitcoin CFDs allow you to trade movements in the price of Bitcoin without owning or purchasing Bitcoin. This is useful because you do not have to worry about security issues regarding Bitcoin, such as encrypting your wallet, downloading a back-up, etc. When trading CFDs, there is no need to purchase the underlying asset. This makes investing in Bitcoin safer for those worried about the security of Bitcoin or those who do not want to set-up a wallet and purchase Bitcoin. Traders can speculate and make money on large price movements without needing to know how to acquire or store Bitcoin securely. Also, another benefit is that you can buy or sell Bitcoin at exchange prices. Trading in Bitcoin directly means you would have to sign-up to exchanges or purchase Bitcoin at a mark-up from the market price. Trading CFDs means you can buy or sell at the market price and gain more from large swings in either direction.

You can trade Bitcoin CFDs at InterTrader. Without ever buying or selling bitcoins, CFDs offer you a way to trade on their value. And with CFDs, you can profit whether the price goes up or goes down. CFDs provide leverage for your money, typically perhaps only five to one up to twenty to one with bitcoins because of their volatility, but this still means you have to be careful as you can lose more than your total account value, and be called on for funds from elsewhere.

Provided you're happy accepting that risk, bitcoin CFDs are a great way to become involved in the virtual currency markets. You can choose a broker who is regulated by the Financial Conduct Authority (FCA) in the UK, or other government agencies. You can fund your account easily, whereas to actually buy bitcoins you need to use a nonreversible money instrument, so cannot use the convenience of credit cards.

To trade bitcoins with CFDs, first you would choose your currency pairing, as in this regard bitcoins are treated just like any other currency. The major currencies are available, such as XBT/GBP, XBT/EUR or XBT/USD.

Say for example you anticipated that bitcoins would fall in value compared to the pound sterling. Let's assume that one CFD provider is quoting spot foreign exchange for XBT/GBP at a selling price of 307.03 and a buying price of 309.03. In other words a bitcoin is worth a little more than £300. You could open a short position selling 10 CFDs at 307.03. The price falls, and once the quoted buying price has dropped from 309.03 to below 307.03, you have covered the spread and start making a profit.

Say you closed out your position when the quote for XBT/GBP fell to 283.41/285.41. You would have made 307.03 minus 285.41 on each contract, for a total profit of £216.20 on the 10 contracts. With many brokers, there is no additional commission charge, as the fees come out of the spread.

As a note about the volatility of bitcoin, the value has varied between $430 and nearly $2600 between January 2016 and June 2017. The value varied between $12 and $980 in 2013, showing the extreme volatility that has scared many from fully embracing the system.

Many people who are interested in trading bitcoins find CFDs are much easier than dealing directly in the currency. If you want to buy bitcoins directly, you have to be concerned with security issues such as encrypting your ‘wallet’, keeping a backup, etc. and you still wouldn’t be able to make money directly on a fall in value. As always, CFDs provide a tax efficient way of profiting from the change in value of a financial instrument without ever having to buy anything.

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