For latecomers to the cryptocurrency craze, there are always derivatives.
As the price of a single bitcoin hovers between the US$8,000 and $9,000 mark (about R100,000), cryptocurrency contracts for difference (CFDs) — which allow investors to speculate on the price movements of digital currencies without having to physically buy them — are soaring in popularity.
IG, one of the world’s largest online trading providers, reported that cryptocurrency trades amounted to 5% of its over-the-counter leveraged trading revenue for the six months to November 2017 — a tenfold increase on the previous comparable period.
Plus500, an online trading platform listed on London’s Alternative Investment Market (the equivalent of the JSE’s AltX), said in a trading update that strong volumes in crypto-CFDs had lifted profit for the year to December above market expectations.
"Cryptocurrencies are virtual currencies that operate independently of banks and governments, but can still be exchanged — or speculated on — like any physical currency," says IG.
About 70% of IG client accounts with open positions on bitcoin are long the cryptocurrency — that is, they are expecting the price to rise. Only 30% are shorting the crypto, expecting a drop in price.
Clients are limited to a £250,000 exposure across all their cryptocurrency holdings. When IG’s exposure limit is reached in terms of the amount of cryptocurrencies it is prepared to hold on behalf of clients, no new long positions can be opened until trading volumes change.
South Africans wanting to trade cryptocurrency CFDs on the IG platform need to do so from an offshore account. IG is considering offering such products locally, should the regulators allow, says IG analyst Shaun Murison.
With well over 1,000 to choose from, the major online trading platforms offer fewer than 10 cryptocurrency CFDs, opting to focus on the largest and most liquid cryptos, such as bitcoin, bitcoin cash, ether, litecoin and ripple.
IG sources prices from the most liquid cryptocurrency exchanges globally in an attempt to offer clients the best bid-offer quotes, says Murison.
CFDs allow users to inject leverage (debt) into their bets, which amplifies profits and losses. Though gaining exposure to an asset for which you do not need to pay the full value is tempting, this can cause huge losses just as quickly as it drives returns.
"Traders must be aware that gearing can work against them as much as it can work for them," says Nilan Morar, head of the trading desk at GT Private Broking, the private label division of online derivative trading platform, GT247.com. GT247.com plans to launch cryptocurrency CFDs in the coming weeks on strong client demand, he says.
Recognising the risks involved, the company will start small, limiting its own and its clients’ exposures, and capping gearing at between two and three times. "You don’t want [clients] to get carried away with this stuff and ignore the risks," Morar adds.
And taking leveraged bets on an already volatile currency is risky indeed.
The price volatility of bitcoin over a rolling 30-day period is currently about 140%, up from 60% in November, says Morar, referring to the deviation from the mean price over that time.
This compares with just 8% for the euro-dollar currency pair and 9% for sterling-dollar over a 30-day window. Considered a more volatile currency pair, the Mexican peso-dollar has a price volatility of just 13%.
"Brace yourself and understand there is volatility inherent in [cryptocurrencies]. Once you understand that, understand further that the moment you introduce leverage, in the form of CFDs, you amplify the effect of the volatility," says Morar.
IG has reduced its leverage on bitcoin from five times to 3.3 times, requiring that traders put down a margin of at least 30%. At a price of $8,500, that translates into a margin of $2,550 (about R30,000). On ripple, litecoin and ether, the leverage limit is 2.5 times — a 40% margin.
Plus500 allows for leverage of up to 20 times on crypto-CFDs.
However, the European Securities & Markets Authority, as part of a wide-ranging clamp-down on the CFD market, is considering a 2:1 or 1:1 leverage cap on crypto-CFDs. It is also mulling stricter measures, such as an outright ban on the sale of crypto-CFDs to retail clients.
"Regulation is a fantastic opportunity for the cryptocurrency space: it protects investors from fraudulent exchanges [and] brings stability to an otherwise volatile marketplace," said Kevin Murcko, CEO of cryptocurrency exchange, CoinMetro. He was responding to comments made by the International Monetary Fund’s Christine Lagarde in a CNN interview that cryptocurrency regulation was "inevitable".
Others are more sceptical.
"By their very nature (that is, distributed networks), I don’t really believe cryptocurrencies actually lend themselves to effective regulation," says Deon Gouws, chief investment officer at Credo Wealth. Gouws, who has a personal interest in cryptos, thinks they will become an asset class only once there is increasing acceptance by users and market participants. This, he says, is already under way.
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