FCA consider banning Crypto CFDs – three reasons this is a good and bad idea….

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So the FCA is planning on banning crypto CFDs… What does this mean for your weekend?

Not a lot really because most brokers don’t let you trade cryptocurrencies on weekends, but they do let you trade them on CFDs.

So we’ll take a quick look at why the FCA’s considered ban on crypto derivatives is a good and bad idea.

Why the FCA’s ban on crypto CFDs is a good idea

They are massively volatile. It’s no secret that most traders have a hard time making money with CFDs and generally the more volatile a market the harder it is to predict and trade. So it follows that if traders are trading nice boring stocks that move slowly in one direction they have more of a sporting chance than trading a crypto like Bitcoin or Ether that goes up and down more than a (umm well, if you’re a trader you’ll know the phrase).

Most traders don’t knows what they are. Cryptocurrencies are digital tokens that use the blockchain and you can use them to pay for things (sometimes). Or are they and can you? Massive brokers may be able to pay for football sponsorship deals in Bitcoin (cough cough eToro) but you can’t buy your weekly shop as Tescos with them. Sure you don’t need to know how to drill for oil to invest in BP. But apart from the major cryptos like Bitcoin and Ether they just seem made up and could vanish worthless in a puff of smoke.

Crypto trading is very expensive. The spreads are massive and the overnight funding charges are so high that if you hold a crypto CFD position with some brokers for more than a couple of weeks all your profits will be eaten up in financing charges. To be fair to brokers, crypto trading has to be expensive because they have to deal with crypto exchanges, cybersecurityty risk, excessive volatility and the uncertainty of a new asset class.  All these things make hedging crypto currencies expensive and these costs will be passed on to the trader.

Reasons the FCA’s ban on Cryptocurrencies derivatives is a bad idea

Playa’s gon’ play, traders gon’ trade. If there is something to speculate on traders will try and profit from it.  Cryptocurrencies are a financial asset class and as such have a price that moves up and down. It’s basic human nature to try and beat the market. Traders have the right to trade what they want, who are the nanny state to tell them what they can and can’t bet and trade on.

The ban will increase scams and unregulated brokers. As above if traders are going to trade it anyway, it is better that they do it with a safe, FCA regulated and established financial service provider. If this is not possible and the only place to trade CFDs on the Bitcoin price is with some bucket shop, “regulated”, in Vanuatu traders are going to get ripped off by little oiks posting pictures of wods of cash in rented Lambos on instagram. One of the FCAs remits is to stop us all being scammed and trading offshore is a pretty good way for a fool to be separated from his money.

Mitigates direct trading risk. Using a broker is the very basis for doing something you can’t do direct yourself, for ease, cost and safety. If you want to trade Gold, it’s daft to go out and buy a set or earings, if you want to trade oil, you don’t fill up barrels from the petrol station. With Crypto you can of course buy and sell tokens on crypto exchanges, but it’s more expensive than trading CFDs. Plus, what if you lose your USB drive down the back of the sofa?

If you still want to trade cryptocurrency CFDs you can:

Or, if you’re interested in reading FCA published literature you can read up on the Cryptoasset Taskforce here on the FCA website.

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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.