Converting Bitcoin hype into profit

If you’re unsure about profiting off Bitcoin, what you can be surer about is profiting off the hype surrounding Bitcoin. It’s not exactly a case of “If you can’t beat ‘em, join ‘em”, but rather,“if you can’t beat’em, at least take advantage of ‘em”.

Bitcoin CFDs have allowed traders to do just that. Without any need to purchase actual Bitcoin, traders can seek to profit off the volatility of Bitcoin; in a far simpler process, far more quickly, without any of the security concerns, giving possession to essentially the same thing - a digital concept.

If Ever Iconoclastic

Bitcoin created by a handful of geeks, is an investment vehicle that only few properly understand, but one that everyone is talking about. Unlike stocks or bonds, Bitcoin offers no revenue stream. Unlike commodities, it has no practical value that can be used to determine intrinsic value. Yet to define it as a currency is still inaccurate because it is in no way tied to the financial performance of a sovereign nation.

The Rapid Rise

Worth little more than $400 in January 2016, the price of Bitcoin hit the “wishlist” price of $10,000 in November 2017, it then scraped the $20,000 glass ceiling in December 2017, to then endure a landslide fall to around $11,000 in just the next month. In the 12 months leading to November 30, the price of Bitcoin multiplied 1,773% bringing its total market capitalization to nearly $170 billion, a sum that is comparable to that of General Electric. In our otherwise quiet and stable period of economic volatility, particularly for stocks and bonds, this dramatic price action has made this phenomenon way too distracting for many traders to ignore.

Wild Volatility, Crazy Volume

These astronomical figures have left most people in consensus that Bitcoin is in a bubble reminiscent of Amsterdam’s tulip mania. The million dollar (or perhaps Bitcoin) question is when this bubble will burst? This burst may have already happened with China announcing its ban on mining centers, South Korea’s ban on trading all cryptocurrencies and many more growing tiresome of overpayingfor cryptos. Yet others still, are maintaining that one Bitcoin could reach $40,000 by the end of 2018.

This roller coaster ride of volatility, while it is exhilarating for some, has tested the nerves of pundits, just as it’s tested the dealing capacity of numerous exchange platforms. Trading volume on Bitcoin has seen near record highs. Coinbase, one of the larger exchanges, reported that in one period of record high volatility their platform’s speed was reduced dramatically. The extreme trading action where tens of thousands of accounts were being opened or closed at any given moment, reduced their platform to a crawling pace. Not too unlike the four-year-old who stays up bleary-eyed at an evening party, it’s a bad case of FOMO, Fear Of Missing Out, that have left many hawking their screens in case of a steep change in price action. Javier Paz, an Analyst at consultancy Aite Group said “it’s during periods of high volatility that you get bottle-necked and start incurring operational issues, the processing offices get clogged-up dealing with thetraffic influx”.

Crypto needn’t be Cryptic

The ability to profit from the volatility and increase trading margins from losses as well as gains, has attracted many to Bitcoin CFDs. Bitcoin “Contracts For Difference” enable traders to exchange the difference in the price at the time of the trade and then later at the time of the settlement. CFD’s is a market concept that was traditionally used in relation to commodities. For example, a market participant who didn’t actually want to buy corn, but just wanted to invest in the price of corn, bought its value at $5. By the time of settlement the price of corn may have gone up to $7, netting the market participant a profit of $2, or it may have gone down to $3.40, causing a loss to the market participant of $1.60. CFDs are essentially intermediary contracts that enable investors to make money from price swings in the market, by either ‘shorting’ it when the market goes down or ‘longing’ it when the market goes up.

There are numerous attractive features for trading the CFD over the core asset. CFD’s are purchased from a broker, not from an exchange, so the customer service tends to be better, the platforms are more accessible and easier to use and in Bitcoin’s case, you don’t have to worry about storage in a wallet, which eradicates the risk of your investment getting stolen. Least of all is the concern that there is no purchase of the actual asset, as can be a concern when normally trading CFDs. Uniquely, in this case, they both essentially represent the same thing, a digital monetary concept. Bitcoin, much like its CFD, does not have future dividends and the value of both is set by expectations of future demand or future resale value. Neither are much affected by global economic factors and both have limited value fundamentally.

Leverate, a leading provider in software trading technology, reported that over the course of 2017 the trading volume of Bitcoin CFDs, executed via their platform, grew exponentially, superseding the volume of all other individual forex pairs. In January, Bitcoin CFDs represented merely 0.47% of all trades, but by December this percentage grew to an incredible 42.5% of total volume. This growth of interest in Bitcoin saw an increase over 30% of the cumulative amount of trading executed.

An industry expert within Leverate speculated that “Other dominant crypto coins, such as Ethereum, Ripple, and Litecoin, also enjoyed a month on month rise of increased volume. We feel that with such a fantastic precedent now set, we are excited to enter 2018, as we expect Crypto volume to keep increasing accordingly”.

It Makes Just Enough Sense

Despite concerns about the underlying product either as a store of value or as a means of payment, Jamie Dimon head of JP Morgan Chase whoconspicuously called Bitcoin a “fraud”, is still weighing the opportunityof providing bitcoin futures tocompany clients. Lloyd Blankfein, Chief Executive of Goldman Sachs put it this way, “It’s not for me, but there’s a lot of things that weren’t for me in the past that worked out very well… but I can’t say it’s a fraud, or that it can’t work out, because it could”. And it is this element of possibility that is keeping everyone attuned.

Robert Shiller, the Yale economist who wrote Irrational Exuberance, perceives the demand for bitcoin arising from the same deep anxieties of post-modern life that put Donald Trump in presidency. “Somehow it gives people a sense of empowerment, when they can’t make sense of anything. It’s a thinking where ‘I can convince myself that I understand what is happening, I can speculate based on what I know, get rich and feel validated with a sense of certainty”.

The call to regulate

There are many who have sought to stabilize the growth and development of Bitcoin by calling for a system of cryptocurrency regulation. Government regulation brings with it formal recognition and a degree of consumer protection. The more people feel comfortable trading bitcoin as a safe asset, the more likely its volatility will become subdued. But the entirely new paradigm of cryptocurrency means that any possibility of imposing an industry wide regulation system is only going to happen well into the future, once government authorities get their heads around how to exert control over an asset based on cyber technology.

In the meantime, the absence of regulation has only served to provide additional fuel for trading volatility. Just like the loose monetary policy that precipitated the .com bubble of 2000, prices are being erratically driven by hype, rather than by fundamental criteria.

Bitcoin, may be the source of the buzz, but it’s Bitcoin CFDs that represents the roller coaster ride that traders are all waiting in line for.