Bitcoin Spread Betting

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Bitcoin Spread Betting

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What is Bitcoin Spread Betting?

With the continued rise and legitimization of Bitcoin and blockchain technology, many speculators want to figure out the best way they can capitalize on this asset class and make a profit. One of the options is purchasing a cryptocurrency such as Bitcoin or Ether as a speculative asset, hoping the price will rise in the future, but there are a multitude of other ways for savvy investors to make money in this emerging market (and without having to even own the underlying asset).

The two most used options for investing in the cryptocurrency space without purchasing the underlying asset are Contracts for Difference, frequently referred to as CFDs, and spread betting. Spread betting can be applied to any financial market, not just cryptocurrencies, and lets traders speculate on whether the price of that asset will rise or fall. Spread betting refers to betting on the price of the asset in reference to its spread, or the difference between the lowest selling price, known as the bid price, and the highest buying price, known as the ask price. If you think the cryptocurrency will increase in price, you select the bid price, and if you think the market will decrease, you choose the ask price.

How Does Cryptocurrency Spread Betting Work?

The first thing you need to do is choose the cryptocurrency you would like to speculate on. Once you’ve decided on an asset, you need to determine whether you think that cryptocurrency is going to increase or decrease in price. If you think the price will go up, you will take a long position, or a positive position, and if you think it will go down, you will take a negative position know as a short position. At this point, you determine how much money you would like to invest per increment of market movement, commonly referred to as your stake.

Since spread betting gives you the opportunity to invest with leverage, it is a riskier than traditional investing, as you only need to put up a fraction of the value you are trading. This leverage means your possibility of profit (but also loss) increases, and you have lesser room for mistakes. You can partially manage some of your risk by setting stop-losses and determining at what price points you will take profit.

The Advantages and Disadvantages of Cryptocurrency Spread Betting

Although by utilizing CFDs investors do not have to own the underlying asset, they still require a capital gains tax to be paid on all profit. Since spread betting is literally considered gambling and not investing in the United Kingdom, speculators are not subject to taxation on their profits. Although spread betting is regarded as gambling, it is strictly regulated by the Financial Services Authority of the UK, or FSA, meaning all brokerage firms have to adhere to preset regulations.

These are major advantages in terms of regulatory adherence and lack of taxation of profits, but there is a negative side to cryptocurrency spread betting. If you are unsuccessful in your trading and lose money, you are not able to write off your losses like you would for other types of trading losses. This goes hand in hand with not being taxed on profits.

Depending on the outcome, another major risk or advantage is the ability to invest with leverage. This means that if you choose to do so, you can have greater market exposure and greater risk than you would usually have with an equal amount of money. Although trading with leverage is inherently much riskier, we mentioned that setting stop losses and profit levels can help you to statistically mitigate some of that risk. Another thing to consider, especially with Bitcoin and cryptocurrency spread betting, is that brokers typically do not charge trading commissions and allow 24-hour trading. However, since many brokers will not charge commission on spread betting, they may charge wider spreads, another factor that will increase your risk. This is why it is always important to do your own research before choosing a broker.

Are There Any Risks Involved With Cryptocurrency Spread Betting?

As we just covered, the risks of spread betting are directly tied to the potential benefits. Since spread betting gives traders the opportunity to trade with margin, they have a higher change for profits or losses, as well as a higher risk profile. Also, since spread betting is considered gambling and is tax free, you will not be taxed on your profits, but will not be able to make a tax deduction on your losses. We mentioned different trading techniques that will help you mitigate these risks even if you’re margin trading.

Spread Betting Vs. Trading CFDs

Spread betting and CFDs both offer investors the ability to trade in a market without owning the asset. Both methods also offer users the ability to trade with leverage, meaning there is a higher risk and higher reward potential in both of these cases. You also have the option to go either short or long when determining the asset price.

The biggest differences between spread betting and CFDs is how they are handled for taxation and their legality as a trading option in many countries. With CFDs you have to pay capital gains tax on profits, but you are also able to write off your losses; with spread betting neither is an option. Also, since spread betting is considered gambling, it is widely illegal depending where you live. These limitations often make spread betting only available to people in the United Kingdom and Ireland, while CFDs are available to most parts of the globe.

Where is Spread Betting Legal?

Spread betting is legal in the United Kingdom, Ireland, some parts of the EU, and Canada, but if you do not live in a country where spread betting is offered and you open an FSA regulated account, you may no longer be tax exempt. This will be depending on your country’s financial and tax regulations and needs to be determined on a case-by-case basis. Since spread betting is considered online gambling and not trading, it is notoriously illegal in the United States.

What Assets Does a Good Spread Betting Service Offer?

Since different spread betting services will offer you different options, you must pick the correct exchange for your needs. Generally, spread betting brokers will not charge you any commission to place your bet, but that means they need an alternative way to generate profit for themselves. Instead of taking commission, the broker will create an inherent “fee” by slightly widening the spread in their favor. For example, if the cryptocurrency you are investing in would have a normal buy price of $400 and a normal sell price of $403, the broker will widen the margin to $398 to sell and $405 to buy, allowing them to profit on your spread. Before registering with a specific broker, such as Plus500, make sure their spread offerings are within your margin tolerance. 

Another aspect you want to consider before placing your spread bet on a platform is to see the point range or “pips” considered market movement. For certain assets, the movement can be as low as 0.4 pips, but can sometimes reach up to 3.0 or higher for markets like crude oil. You also want to make sure that the spread betting platform you are registering with offers the correct cryptocurrencies you would like to bet on. Many platforms will offer 10s of thousands of different markets you can spread bet on, but when it comes to cryptocurrency, the options are much fewer. Although you have the option to place spread bets on as many cryptocurrencies as the platform offers, they will mostly likely only offer the largest cryptocurrencies by market capitalization, starting with Bitcoin and Ether. 

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Bitcoin Spread Betting Tips

When first getting started with Bitcoin spread betting, it is very important that you do not over leverage yourself. Even if you are very confident in your predictions, if you over leverage your position, a small fraction of market movement will have the potential to wipe out your position. You want to start slowly and consider increasing your leverage as you become more experienced. Remember, spread betting is considered gambling, and just with CFD trading alone over 75% of accounts lose money. Make sure you start slowly and learn as much as you can before over extending yourself.

Concluding Thoughts

All in all, Bitcoin spread betting has many different pros and cons when compared to traditional investing or trading CFDs, so you need to evaluate what your goals as an investor are to choose the right path for yourself. There are many ways to gain market exposure in this new and evolving market, so you need to choose the best method for yourself. For some of you, this may be Bitcoin spread betting, but for many, you may choose to take a different route. Yes, Bitcoin spread betting is very risky, but it can also be extremely lucrative if you know how to play the market correctly and make the right decisions.

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