What's all the fuss about Bitcoin?

Unless you’ve been living under a rock for the past 12 months, you’ve no doubt heard about Bitcoin. Once solely the realm of nerds, hackers and libertarians, Bitcoin’s stellar performance in 2017 has begun to attract widespread interest from the traditional finance sector. Due to popular demand, FP Markets has recently added the BTCUSD contract to our already extensive CFD offering. This article is intended as a quick primer on Bitcoin, as well as an explanation of the differences between trading “physical” Bitcoin and Bitcoin CFDs.

BTCUSD Jan 2017 – Nov 2017: Bitcoin’s jaw-dropping 1000% rally

So what is Bitcoin?

Bitcoin is a decentralized “cryptocurrency” intended as a store of wealth and a means of carrying out transactions and payments online. Unlike traditional fiat currency, which is persistently inflationary and issued by a central authority (governments and reserve banks), the Bitcoin supply is limited to just 21 million units and is issued and maintained by a network of computers. Bitcoin is minted through a process called mining, where users lend their computing power to the Bitcoin network and are rewarded coins for verifying processing and recording transactions. Once a transaction is recorded on the “blockchain” it is immutable, irreversible, this makes it attractive to web sellers in industries prone to consumer fraud and credit card chargebacks.

Issues with buying, storing and trading “physical” Bitcoin

Though Bitcoin and cryptocurrency is now more than 6 years old, the industry still faces a lot of issues. Purchasing Bitcoin with fiat currency has long been a very difficult and expensive process and very little progress has been made on this front. Due to regulatory uncertainty and Bitcoin’s disruptive, competitive nature, Bitcoin startups and firms have had a hard time building relationships with traditional banking institutions. If you were a bank, would you be looking to make life easy for an industry whose stated aim is replacing you?
Another issue with ‘physical’ Bitcoin is the fact that it isn’t really a physical object you can hold, Bitcoin is just data stored on computers. Now one could argue that the vast majority of traditional currency only exists on computers as well, but the difference is, if a hacker breaks into your bank account, your bank will generally make you whole again. As the Bitcoin network is centralized, there is no one to complain to or refund you if you are the victim of theft. Over the years there have been a large number of security breaches and thefts at major Bitcoin exchanges, with customers losing millions of dollars and generally having very little avenue of recourse.
In 2017, Bitcoin has also become quite costly to transact with; though it is still exponentially cheaper and quicker than an international wire transfer, transactions now generally cost around $5 USD per piece and take at least 30 minutes to confirm.

Advantages of trading Bitcoin CFDs

Unlike Bitcoin start-ups, forex and CFD brokers have long standing existing relationships with the banking sector. Forex and CFD brokers generally have a wide range of instant, fee-free deposit and withdrawal options, meaning you can fund your account and take a position in the Bitcoin market in a matter of seconds. CFDs also let you exit positions at the drop of a hat, if you hold physical Bitcoin and the market begins to crash, you will have exposure for as long as it takes you to withdraw and sell your Bitcoin for fiat currency.

Another advantage stems from the fact your CFD broker doesn’t deal in “physical” bitcoin. As such, the risk of theft is almost non-existent when compared to exchanges who actually store, buy and sell Bitcoin and other crypto-currencies. If your broker’s segregated accounts with their banking partners were somehow compromised by thieves or hackers, you would no doubt be made whole again.

CFD brokers also generally allow easy and cheap access to leverage, allowing you to take larger positions in the BItcoin market with the same initial investment. Though leverage is available at some Bitcoin exchanges, it is generally provided through internal peer-to-peer lending markets and can be very expensive when compared to CFD rollover costs. When Bitcoin is rallying, USD lending rates tend to increase dramatically and you can pay upwards of 30% per year just to finance your long position.

Bitcoin CFDs take the hassle out of trading Bitcoin and allow you to focus on trading.

Summary

  • Bitcoin’s is a decentralized “cryptocurrency” intended as a means of storing wealth and transacting online
  • Unlike traditional fiat currency, Bitcoin is issued and maintained by a network of computers, not a central issuing authority
  • Bitcoin’s amazing performance in 2017 is starting to attract widespread attention from the traditional finance sector
  • Bitcoin has become quite expensive to transact with and Bitcoin holdings are favoured targets of hackers and e-thieves
  • Bitcoin CFDs take the hassle and theft risk out of Bitcoin trading and make the market readily accessible to your average trader and investor

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