The purchase of virtual currency is difficult and expensive. With CFDs, on the other hand, it’s easy to speculate. In addition, so can be set on falling courses.
According to the hype-cycle theory, every new technology, such as the Internet or 3-D printing, goes through five different phases of public attention. First, there is a technical breakthrough or an exciting project, which is of particular interest to the professional audience. Phase two is followed by broad coverage with unrealistic expectations of the new technology. In their environment, more and more companies are being created, which are being rated higher and higher.
But at some point it turns out that the expectations are too high, they can’t be fulfilled. It follows the third phase, the valley of disappointment. Stock prices are falling, reporting is ebbing, and few players remain in the market. But now phase four follows: a growing understanding of the benefits, but also the limitations of the new technology. The expectations adapt to the reality. Now is a good time to invest as the prices of the remaining companies start to rise again. Finally, in the fifth and final phase, they reach a productivity plateau where they grow stably. “In fact, a lot of cryptocurrency reminds me of this hype cycle,” says Frank Schwab, fintech entrepreneur and co-founder of the FinTech Forum. Thus, the Bitcoin saw the light of day as the first Internet currency in 2008. Today there are more than 4,500 virtual processing units.
In addition, the prices of many cryptocurrencies in 2017 have gone through the roof. At the beginning of 2016 there was a bitcoin for 450 US dollars. By the end of 2017, he climbed to nearly 20,000 US dollars. At times, price targets of half a million dollars and more were mentioned. No less spectacular were other virtual currencies such as Ripple or Ethereum. This also reflected the expectations of some virtual money: At some point, so the idea, it will completely replace paper money and become the world currency.
That the idea of the Internet currencies last ignited so, should have several reasons. Anyone can pay for it — no matter where he is. Many of the virtual processing units also enable fast, secure and cheap payment transactions. “In addition, they are not subject to government control, operate independently of central banks and banks, and their amount — unlike paper money that can be created indefinitely — is limited,” says Uwe Zimmer, managing director of digital asset manager Fundamental Capital. So far, about 16 million Bitcoins have been generated by computers. The upper limit of 21 million will be reached in 2140.
However, the technology on which many crypto currencies are based is particularly interesting: the Blockchain. “This works so that the data of all transactions with the cryptocurrency are stored decentrally on all computers and smartphones in the network and verified by it,” explains Schwab. “There are practically no manipulations possible.”
Although air was last released from the hot market. For example, a Bitcoin currently only costs around $ 7,000. “Nevertheless, I assume that we are still in the second phase of the hype cycle,” says Schwab. But maybe the next phase, the Valley of Disappointment, is already close. Then it will come to a market adjustment. “I can imagine that in the end only a few cryptocurrencies are left, which work as a means of payment without large price fluctuations.
That’s why it can be worthwhile putting together a portfolio of some virtual computing units today, but the direct purchase of cryptocurrencies has a few drawbacks: First of all, the acquisition of the It only goes through crypto exchanges.” Investors must bear in mind that these are still not subject to supervision,” says Salah-Eddine Bouhmidi, analyst of the information service DailyFX Germany.
However, if cryptocurrencies come under pressure again, then heavy losses are programmed. Interesting variant here, Contracts for Difference, CFDs for short, could be an alternative, since it is easy to speculate on cryptocurrencies. Other strategies can be implemented, such as long for one cryptocurrency and another for a short.
To trade CFDs, investors must open an account with a CFD provider and deposit a safety margin there. This is usually five to ten percent of the nominal value of the investment. For virtual currencies, this is usually much higher. Basically, investors can speculate on Bitcoin with little capital and leverage, with the disadvantage that they do not physically own the cryptocurrency. Example: An investor buys two Bitcoins at a price of 7,000 US dollars each through CFDs. If the security margin at ten percent, he must deposit $ 1,400. If the Bitcoin price rises by five percent to $ 7,350, the investor makes $ 700 profit less costs. Based on the capital employed, the profit is therefore almost 50 percent. If the course falls, however, the safety margin can be used up quickly. In the worst case, the $ 1,400 are gone. Unlike before, however, investors no longer have to pay additional funds. Since August 2017, the Financial Regulator prohibits trading in CFDs when investors lose more than their account balance. But if you want to trade cryptocurrencies in this way, you have to search. Not all providers offer virtual currencies. These include Ayondo, where Bitcoin and Ethereum can be traded, as well as FXFlat and JFD Brokers, both of which have CFDs on Bitcoin in their program. Another broker is ActivTrades (Bitcoin, Ethereum, Litecoin). The biggest offer is IG and Admiral Markets. In addition to Bitcoin, IG, Ethereum, Litecoin, Ripple, Bitcoin Cash or Bitcoin Gold can be traded. Admiral Markets provides access to Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Ripple, Dash, Monero and Zcash. The largest broker in this country, CMC Markets, is only possible for professional traders to acquire Bitcoin and Ethereum. “For a long-term commitment, CFDs are not yet suitable because of the high costs,” says analyst Bouhmidi to consider, “but this can implement a number of interesting strategies.”
For example, securing cryptocurrencies in your own e-wallet by relying on falling prices, that is short (see sample calculation below). Benefit from falling prices. This investment alternative via CFDs can be exciting for another reason. If cryptocurrencies actually enter Phase Three — the Valley of Disappointment — then falling prices are definitely to be expected. A security with CFDs is then particularly valuable.
Cryptocurrencies; these are digital means of payment, which enable payment transactions without banks through decentralized data management. Typically, a number of currency units are generated by the entire system together, with the set being limited by a cryptographic mode. First traded crypto field since 2008 is the Bitcoin. Since then, more than 4,500 crypto vouchers have been created, of which 1,000 have a daily trading volume of 10,000 US dollars.
CFDs; these are Contracts for Difference. With CFDs, investors speculate on the difference between the buying and selling price of an underlying that is not physically purchased. These are indices, stocks, commodities or foreign exchange. Investors can bet on rising and falling prices. Only a small part of the capital is invested, thus creating a leverage effect. CFDs are only suitable for experienced investors who take high risks. Total loss is possible, but also huge profits.
Example calculation Basics: For most providers, CFDs on Bitcoin can only be traded against the US dollar. For this reason, the calculation below is based on dollars. The underlying security margin for cryptocurrencies varies widely and can be up to 40 percent. The example assumes ten percent. The fees are based on a rough estimate.
Scenario: hedging with CFDs against price losses with Bitcoin exit situation:
An investor has a Bitcoin worth $ 7,000 in his e-wallet. He expects a price slump and therefore secures this with two Bitcoin CFDs.
Short position: Buy 2 CFDs on the Bitcoin at a price of $ 7,000:
$ 14,000 net investment = margin (10% of $ 14,000):
$ 1,400 Bitcoin after down 10% to $ 6300:
$ 12,600 short-position gain Bitcoin (14,000–12,600):
$ 1,400 Bitcoin Loss in the E-Wallet (7,000–6,300): $ 700
Estimated Order Fees and Borrowing Costs for 10 Days: — $40
Dollar Profit: $ 660
Earnings: CFDs have the advantage for investors can hedge against Bitcoin and cryptocurrency losses. Although the held Bitcoin loses $ 700 in value, the short position, the investor but achieved on balance $ 660 profit.
Author: Marko Vidrih