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CFD, spread betting and trading Bitcion on leverage carries a high level of risk and can result in losses that exceed your deposits.
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For further information you can read our article how and where to trade bitcoin with a UK broker…
How do you trade in Bitcoin?
The world’s most famous crypto-currency is an obvious target for investors and traders due to its history of rapid gains and falls in value. This volatility makes it both very risky and potentially very lucrative as an investment.
How Bitcoin trading works
The most obvious way to invest in Bitcoin is simply to buy Bitcoins. However, buying Bitcoins limits the investor to betting on an increase in the currency’s value. If you believe that it will decrease in value and you would like to bet on this happening, then you’ll need to acquire a contract for difference (CFD) or place a spread bet.
These two approaches are fairly similar in operation. A contract for difference could specify that if the value of an asset %28in this case, Bitcoin%29 increases above a particular figure %28ask price%29 then the issuer of the contract will pay you the difference between the value and that figure multiplied by your stake. If the value moves in the opposite direction then you will pay the issuer of the contract the difference multiplied by your stake.
Alternatively, the CFD could specify that if the value of Bitcoin declines below a certain price %28bid price%29 then the issuer will pay you the difference multiplied by your stake and you’ll pay them if it moves in the opposite direction. Spread bets are similar except that you are placing a bet with a bookmaker. In the UK spread betting is not subject to Capital Gains Tax, which makes it a popular option.
How to get started
If you are buying Bitcoins then you will require a Bitcoin address. This is a code to which the Bitcoins that you buy will be allocated. You can acquire an address by downloading a Bitcoin client to your computer or setting up an online wallet. Once you have your address you can purchase Bitcoins via an online exchange.
If you are taking out a CFD or placing a spread bet then you’ll need to do so via a broker that offers these services. This will require you to open an account and deposit money. Many traditional foreign exchange brokers now offer the option to trade in Bitcoin. They also generally offer the option of leverage, which is betting using money loaned by the broker.
What to avoid
When using CFDs or placing spread bets it is possible to lose more than your initial stake. This will be amplified if you use leverage. Don’t risk more money than you can afford to lose when you take a position.
Placing stop loss orders which automatically close down your position when Bitcoin hits a particular value are an essential way to limit the risk that you face.
What to look for
The various Bitcoin exchanges and CFD/spread betting companies have different fee structures for their services. Make sure that you’re not being overcharged and that the trading platform on offer is to your liking. As with any investment, the more you know about factors that will impact the price of Bitcoin, the more likely you are to profit.
A trading example
Say that a spread betting company is offering a bid price of 4,300 and and ask price of 4,500. The gambler believes that Bitcoin will increase in value and places a bet of £200 at the ask price. Bitcoin appreciates to 4,550 and the gambler closes their position, taking a payout of £10,000.
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