Using CFDs to diversify your portfolio with Bitcoin

The recent drop in Bitcoin prices has the market speculating that it could be another repeat of 2013’s price fluctuations and that the cryptocurrency has not matured much since then. The price of Bitcoin hit a high of $1153.02 on 5 January before dropping a whole 42% down to $752.11 on 11 January before climbing back up to about $828.68 again on 16 January.

That is just a mere two-week snapshot of the roller coaster ride that perfectly describes the historical prices of Bitcoin.

Many investors may be put off by how quickly the price of Bitcoin rises and falls. However, that should not be a deterrent to investing in the cryptocurrency, especially since it offers a good diversification within your portfolio.

In fact, some are even calling bitcoin the new safe haven alongside commodities like gold. But it is understandable that many still find the instrument to be risky.

There are many questions new investors would be asking, like which wallets should I get to keep my bitcoin safe? How does the blockchain work? How do I ensure that my wallet/bitcoin doesn’t get hacked?

All valid questions there.

So what is a good alternative for those who want to dip their toes in investing in digital currencies without having to deal with all of those concerns? That is where Bitcoin CFD trading comes into play.

Bitcoin CFD Trading: is it for you?

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The good news is Bitcoin CFD trading is for everyone. Like contract for difference (CFD) trading on other investment instruments, Bitcoin CFD trading actually enables investors to speculate on whether bitcoin prices will move up or down without ever owning the bitcoin itself.

When a bitcoin CFD is traded, an agreement is made between an investor and a trading house to exchange the difference in value of bitcoin from the time when the contract begins and the time when it is closed.

As with any CFD trade, the underlying asset is not traded, but the investor decides which price they want to close at. The greater the price movement that bitcoin makes, the greater the profit (or loss).

A CFD stipulates that the difference in value of bitcoin from when the contract is opened to when it is closed must be paid. Such contracts can be made with institutions like IG, for example. If you wish to close your bitcoin CFD, simply place a trade of the same value in the opposite direction.

So despite the price fluctuations of bitcoin, you are able to manage your risks by dictating the price you want to close at.

Why Bitcoin CFD trading has its benefits

Source: Shutterstock

Investors who trade CFDs on bitcoin will never actually own the bitcoin, which tends to come with its set of concerns and risks. These are some of the concerns that will be negated when an investor does not hold onto the cryptocurrency:

• There is no need for a bitcoin wallet to be obtained.

• Investors dealing in CFDs do not need to trade via an exchange, which means that the security problems associated with exchanges are not a factor.

• CFD trades can be opened as either long (indicating that the trader believes bitcoin will increase in price) or short (if the trader believes that bitcoin’s value will fall), giving investors more opportunity to manage their risks.

However, investors should also be aware that shorting bitcoin can be more challenging than shorting traditional currencies, mainly because most bitcoin exchanges are not as tailored to investments as forex exchanges.

The difficulty in making complex bitcoin trades – as well as the need for a specific wallet, lack of credit card or PayPal funding, and scarcity of currency – means that bitcoin does not have the same liquidity in trading as other currencies.

Managing your risks when trading Bitcoin CFDs

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Yes, we said investors would better be able to manage their risks with Bitcoin CFD trading. But that doesn’t mean that Bitcoin CFDs do not come with its fair share of risks. Every investor would be wise to always remember that regardless of the instrument, it will come with risks and the trick to successful investing is knowing how to manage these risks.

When it comes to Bitcoin CFDs, the first thing investors should note is that losses can run indefinitely. Most CFDs are also leveraged and bought on margin, which means that investors are exposed to the full value of the contract for a fraction of its total cost.

This isn’t an issue if you make money off the investment. However, if you happen to be on the wrong side of predicting the price movements, then you may be faced with substantial losses.

Another thing to note is that Bitcoin is much more volatile than traditional ‘fiat’ currencies. A leveraged position on a currency that has been known to drop over $200 overnight – as it did back in December 2013 – can be a very risky proposition indeed.

Traders therefore need to ensure that risk management is set up on every trade. IG offers a number of ways to manage your risk.

‘Guaranteed stops’ is a feature (that come at a premium if triggered) to help you limit your maximum risk if bitcoin’s value suddenly drops (or leaps) against an open position.

Price alerts warn traders when a target is breached. Investors can also check out seminars and guides which offer a comprehensive view of how to trade with as little risk as possible before trading CFDs on Bitcoin.

So if you think you’re ready to trade CFDs on Bitcoin, it is as easy as signing up online here.

This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views expressed in the article are the independent opinion of ZUU.

Important Notice:

Bitcoins are NOT legal tender currency in Singapore.

The trading of derivatives on Bitcoins is NOT currently covered under any regulatory regime in Singapore.

The customer cannot seek recourse from the Monetary Authority of Singapore (“MAS”) nor the Financial Industry Dispute Resolution Centre (“FIDReC”).

Please ensure that you are fully aware of the risks and if in doubt consult an independent financial adviser. For more information on Bitcoins, please refer to the following website for more information: MoneySense – Virtual Currencies.