Dramatic price fluctuations in the bitcoin market have the trading world abuzz, especially following the spikes earlier this week, and the subsequent crash to nearly half that much. This volatility allows bitcoin trading to be continually popular, as evidenced by the slew of brokers and binary options providers that have recently started offering bitcoin trading, including AvaTrade, Trade Rush and Plus500.
In April 2013, Plus500 entered into contract with MTGox to track bitcoin prices and offered its traders the ability to trade bitcoin using 1:4 leverage and to enter short trades. When Bitcoin first emerged in 2009, it sold for less than a dollar; it sold for over $900 earlier this week before it plummeted again. This steep fluctuation, however, has caused bitcoin brokers to reconsider the way they handle these trades, and, as reported yesterday by Forex Magnates, Plus500 is now the first broker to prohibit overnight holding of bitcoin trades.
This risk reducing measure put Plus500 in a more secure position. However, it means that traders have to reopen their positions every morning, limiting their ability to speculate on the appreciation of bitcoin prices for the long term.
CFDs and Bitcoins
Bitcoin can be purchased and exchanged for standard currency, such as dollars, euros and yen at Bitcoin exchanges. Trading bitcoins through CFDs differs from real bitcoin trading however, since the CFD broker must always trade in the opposite direction of his traders. So when his traders long a bitcoin, the CFD broker shorts it. This is what Plus500 was doing in the same manner it did with its other CFD products. Brokers can generally hedge the underlying products of CFDs but during periods of long trending markets, investors tend to lean heavily, sometimes over 80% of the time, in one direction or another-either longing or shorting it.
This is when the risk comes in. When bitcoins reached a high of $900 within a month, brokers found themselves facing a difficult predicament. The drastic rise in price in conjunction with wide spreads can leave brokers vulnerable to steep losses. It is for this reason that Plus500 restricted its bitcoin trading policies by removing the leverage it had previously offered and introducing a daily close for all market positions of 10PM GMT. We'll be watching the other brokers carefully to see if they will follow suit.