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ForexCFDs now offers Cryptocurrency Trading

  

What are cryptocurrencies?

Cryptocurrencies are digital assets/currencies which are specifically designed to function as a medium of exchange and/or speculation – much like any physical currency. ‘Cryptos’ as they are commonly known, are independent of banks and governments.

  
There is a large and growing number of cryptocurrencies currently available and ForexCFDs offers CFD trading and Spreadbetting on the 2 most popular; Bitcoin and Ethereum.
   

What is Bitcoin:

Bitcoin is a worldwide cryptocurrency and digital payment system widely known as the first decentralized digital currency. It was invented by an unknown person or group under the moniker Satoshi Nakamoto in 2009. The system is peer-to-peer, and transactions take place between users directly, without an intermediary – this is different from how previous payment systems work. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain.
  

Bitcoin CFD example

Let’s say the price of bitcoin is currently 6840.00 to sell and 6865.00 to buy. If you think the bitcoin price is about to fall and would like to sell 5 contracts, you would sell it at a price of 6840.00. The bitcoin price falls to our new price of 6765.00/6790.00. You decide to take your profit by buying at 6790.00.
  

Product Contract Size Lot Size Open Price Close Price
Bitcoin 1 5 6840.00 6790.00

  
Trade P&L = Open Price – Close Price * Contract Size * Lots
                    = (6840.00 – 6790.00) * 1 * 5
                    = 50 * 1 * 5
                    = 250

 
Your gain from the trade in AUD is: $250/AUDUSD Ask Price = $250/0.7588 = AUD329.46
  
On the flipside, if after you sold at 6840, the bitcoin price rallied to 6885/6910, then your loss from the trade is:
 

Product Contract Size Lot Size Open Price Close Price
Bitcoin 1 5 6840.00 6910.00

  

Trade P&L = Open Price – Close Price * Contract Size * Lots
                    = (6840.00 – 6910.00) * 1 * 5
                    = 70 * 1 * 5
                    = 350

 
Your loss from the trade in AUD is: $350/AUDUSD Ask Price = -$350/0.7588 = -AUD461.25

What is Ethereum?

Ether, as it is esoterically known, is a digital platform on which a whole range of applications can be built and run. Examples of these include but are not limited to methods of payment, identification software, as well as cyber security programs.
  
Therefore, even though the popular cryptocurrency is known as ‘ethereum’, it’s more accurate name is ‘ether’ – i.e. the platform.
Just like any traditional currency, you can own, exchange or speculate on ether. As it is virtual/digital, however, the currency operates outside of any centralised authority, such as a specified government or central bank.
  
How can I spread bet and trade CFDs on ethereum? 
In order to trade ethereum’s token, ether, you need access to an exchange, along with a virtual wallet which can take a perhaps a few days to obtain. But when you spread bet or trade CFDs on ether, you never actually own the cryptocurrency.
  

Ethereum CFD Example

Let’s say the price of Ethereum is currently 330.00 to sell and 337.00 to buy. If you think the ethereum price is about to fall and would like to sell 1 contract, you would sell it at a price of 330.00. The ethereum price falls to our new price of 290.00/297.00. You decide to take your profit by buying at 297.00.
  

Product Contract Size Lot Size Open Price Close Price
Ethereum 1 5 330.00 297.00

  

Trade P&L = Open Price – Close Price * Contract Size * Lots
                   = (330.00 – 297.00) * 1 * 5
                   = 33 * 1 * 5
                   = 165

Your gain from the trade in AUD is: $165/AUDUSD Ask Price = $250/0.7588 = AUD217.45
   
On the flipside, if after you sold at 330, the ethereum price rallied to 370/377, then your loss from the trade is:
   

Product Contract Size Lot Size Open Price Close Price
Ethereum 1 5 330.00 377.00

 
Trade P&L = Open Price – Close Price * Contract Size * Lots
                   = (330.00 – 377.00) * 1 * 5
                   = 47 * 1 * 5
                   = 235
Your loss from the trade in AUD is: $235/AUDUSD Ask Price = -$235/0.7588 = -AUD309.70    

 

Bitcoin vs Ethereum

Product Margin Requirement
Bitcoin 30%
Ethereum 40%

 

Bitcoin

  • First available in 2009
  • Used mainly as a currency
  • 16.6 million bitcoins in circulation (or ‘mined’)
  • Market cap of around $108bn (Nov 2017)
  • There is a finite supply of 21 million available (therefore, it is ‘deflational’)

 

Ethereum

  • Initially released in 2015
  • As a currency – even though can be used for other trading programs.
  • 94 million ether units in circulation
  • Market cap of around $31bn [Nov 2017]
  • There is an unlimited supply available (therefore, it is ‘inflational’)

 

Key Points to Note:

  • Price volatility: The value of cryptocurrencies, and therefore the value of the CFDs and Spreadbets linked to them, is extremely volatile. They are vulnerable to sharp erratic changes in price due to unexpected events or changes in market sentiment.
  • Leverage: Due to the high volatility of cryptocurrencies, Capital Index will be setting its leverage for Bitcoin at 3:1 and Ethereum at 2.5:1
  • Charges and funding costs: As a result of the volatile nature of the products, charges tend to be significantly higher than for other CFD products. Fees can include the spread (the difference between the prices at which a firm offers to buy or sell a CFD position) and funding charges. You should consider the impact of these fees on your likelihood of making a profit.
  • Price transparency: When compared with currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of your CFD position. As a result of this, there is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading.