Bitcoins are the first serious effort at producing a virtual, peer-to-peer currency with no central bank or currency issuing authority.
Digital coins can be transferred between parties without the fees involved in currency to currency transactions or other restrictions imposed by the global banking system. The number of Bitcoins in circulation is growing, but that growth is being controlled.
The size of the Bitcoin market is dictated by ‘mining’, a cryptographic process that requires ever increasing amounts of computational power to create new Bitcoins.
Bitcoins can even be converted into more traditional currencies, although the intent of their creators is obviously to provide a virtual, cross-border currency that is not restricted by the barriers imposed by governments and banks.
Many Russian investors seeking to move money quickly out of Cyprus when that country’s banking system looked on the verge of collapse turned to the Bitcoin market to help them.
It is a revolutionary idea.
As a currency, the price of Bitcoins relative to other currencies can change. Sites like Mt.Gox offer the ability to convert real world money into and out of Bitcoins. Any option allows you to trade options based on the price of Bitcoins, including binary and ‘one touch’ options.
Trading Bitcoins
Owners of Contracts for Difference accounts might like to know whether it is possible to trade Bitcoins as well. One of its advantages from the perspective of the Contracts for Difference trader is that it is extremely volatile, providing more opportunities for intra-day trading.
Plus500 was the first forex broker to offer a CFD market in Bitcoin/USD in April 2013 (often quoted as BTC/USD), and it is currently offering 10% initial margin and a 1.06% spread. AvaTrade is also offering 24 hour trading in Bitcoin CFDs, including via its MT4 platform. IG has been offering binary options based on the price of Bitcoins, but has discontinued them. Other brokers may follow Plus500 into Bitcoin CFDs, as demand from traders has picked up.
Spreadex is now offering UK spread betting on the Bitcoin price. It says the currency is “a potential inflation/devaluation hedge.” As with other spread bets, traders are able to go long or short the Bitcoin market. At time of writing, Spreadex was quoting a minimum bet of 50 pence per point with a 2.5% spread a side and 50% margin. Bitcoins are only available on a daily rolling basis with Spreadex and there is no facility to set a stop.
Bitcoin’s relationship with Blockchain
The Bitcoin market relies heavily on the Blockchain, a network of ‘miners’ that provide much of the computing power that the market requires for both transparency and to trace transactions.
Because there is a highly quantitative method being employed to increase the size of the Bitcoin market – you provide me with computing power, I pay you more Bitcoins – the market has been able to win confidence rather than be damned as a Ponzi scheme.
Ultimately, Bitcoins are being powered by very different market dynamics than, say USD or EUR. For brokers, they are difficult to hedge against, as there are no conventional financial instruments offered by large banks that would allow them to compensate risk.
No major banks or exchanges are quoting futures prices for Bitcoins. Hence, we would advise our readers to tread warily when it comes to staking money against Bitcoins, even with a reputable provider. There are a number of firms offering options on Bitcoin prices, for example, but as ever, do check they are licensed by a regulator like the FCA or the SEC.
In addition there are also concerns that the Bitcoin market can be manipulated, in ways that a large forex pair would be extremely hard to influence due to its enhanced liquidity.
The anonymity provided to big buyers and sellers in the actual Bitcoin market make it almost impossible to follow up on any accusations of market manipulation. Hence, there is scope for those with access to significant muscle in the Bitcoin market to place derivative orders ahead of actual significant market activity.
This is not to say that Bitcoins won’t become a valid and popular market for CFDs or options, but currently volume is low compared with conventional financial markets and there are bound to be a few hiccups along the way, not to mention the fact that it is not in the interests of many governments for this market to exist at all!
