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[vc_row][vc_column width="1/1"][vc_column_text]Ever since the Bitcoin phenomenon gripped the world in 2017, it is hard to avoid hearing friends, relatives and co-workers discussing the relative benefits and drawbacks of various cryptocurrencies.
As cryptocurrencies, or “cryptos”, are now more accepted as a form of payment, they also become available to retail investors as tradable securities. Investment platforms like CMC Markets allow trading CFDs linked to Bitcoin, the original cryptocurrency, or Ethereum, its peer competitor.
Trading cryptos is not suitable for everyone. Many investors are unfamiliar with trading cryptos or they simply do not fit their risk appetite. But they are still curious about the phenomenon and are attracted by potential returns. Because of this, they are looking for a safer way to gain exposure to the boom without directly investing in a volatile asset.
Bitcoin is down 70% from December’s record highs of $19,461 but found support above the $5,900 handle and bounced 11% from 2018 lows. Is now an opportune moment to invest in cryptocurrencies?
This report analyses some of the options available for retail investors who are interested in gaining exposure to the cryptocurrency boom. Either directly though Bitcoin CFDs or through blue-chip equities, sensitive to the financial world’s hottest asset.
Since mid-2017, a growing number of media outlets, financial institutions and market commentators have been reporting on the cryptocurrency boom, initially championed by industry flag bearer Bitcoin. Stories of investors without any trading experience gaining returns of 100% or more attracted immense interest to this new and volatile market.
Many traditional investors remain cautious, questioning the fundamental nature of Bitcoin as a currency and suggesting that price surges are speculative rather than generated by fundamental factors. Despite persistent doubt, demand for cryptos has boomed globally and shows no sign of letting up, encouraging investors to examine their portfolios to potentially include crypto-tied assets.
There are multiple reasons why direct investment in cryptocurrencies can be risky. Volatility is a major concern for investors; swings of 20-30% per day can be sudden and commonplace. This can lead to considerable profits, but also significant losses.
Falling on the wrong side of a crypto price swing can be very costly. Increased volatility means that even trading CFDs, a 50% deposit is required to open a position, while spreads can vary between 9 and 100 points, depending on the type of cryptocurrency.
These risks should not to be taken lightly. For investors who do not want to be directly exposed to them, there are alternative opportunities to trade less volatile equities that have some form of exposure to cryptocurrencies.
This still allows investors to tap into the potential of the cryptocurrency boom, however it removes a significant portion of trading risk. Furthermore, the process of trading equities is simpler than cryptos, thanks to the access to a unified investment platform to execute trades and manage your portfolio.
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It will come as no surprise to many that Goldman Sachs has been one of the first major global financial institutions to plan a cryptocurrency trading desk. The US investment bank is famed for its progressive attitude toward the fintech sector (which includes cryptocurrencies) and has been clearing Bitcoin-linked futures contracts offered by CME and CBOE exchanges since May, as well as providing clients liquidity for those futures.
Goldman Sachs is now looking for an opportunity to seize upon the cryptocurrency boom to offset weaker trading in traditional markets. The bank’s plans to create a cryptocurrency trading desk is a sign of growing institutional acceptance of the fledgling market and could be mirrored by its peers.
As a first step, the bank is focusing on developing a safe, institutional-grade custody solution for cryptocurrencies. Additionally, according to Goldman CFO Martin Chavez, the bank is trying to develop over-the counter derivative contracts for Bitcoin, called “non-deliverable forwards”, further adding to the investment options for retail investors interested in the crypto space. (Source: CNBC, 7 September 2018)
Other investment banking institutions, including Barclays, JP Morgan and BlackRock have also created teams to investigate cryptocurrency trading. (Source: DowJones Newswires, 6 August 2018)
While Goldman Sachs may be trading cryptocurrencies, other banks are taking a different approach. A consortium of major institutions, including the UK’s bank Barclays, has begun trialling how the technology that underpins cryptocurrencies, called the blockchain, can be used to guide institutions through the vast MiFID II financial regulations that have come into force in early 2018. (Source: Finextra, 15 December 2017)
Alongside UBS, Credit Suisse and Thomson Reuters, Barclays is investigating how blockchain-based smart contracts can improve data quality and simplify processes. A blockchain is a type of shared digital “ledger” that can be used to record financial transactions, legal information or customer data. Blockchain is incorruptible and easily verifiable, making is attractive to banking institutions for settling transactions and verifying financial data against multiple sources to protect against fraud.
The cryptocurrency boom pioneered by Bitcoin is merely one aspect of the digital banking revolution that is taking shape on financial markets at this very moment. As the value and acceptance of cryptocurrencies grows, more traditional financial institutions will become entangled with the underlying technology and benefit from adopting crypto-based technological standards.
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Source: CMC Markets, 13 September 2018
Will Bitcoin return to July highs of $8,482 (+32%) or fall to 2018 lows of $5,790 (-11%)?
Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width="1/1"][vc_column_text]
Source: CMC Markets, 13 September 2018
Will Goldman Sachs return to 2018 highs of 274p (+20%) or fall to 2018 lows of 218p (-5%)?
Broker Consensus: 50% Buy, 46% Hold, 3% Sell
Bullish: Oppenheimer & Co, Outperform, Target $336, +45% (30 July 2018)
Average Target: $274.83, +20% (13 September 2018)
Bearish: Berenberg, Sell, Target $200, -14% (20 July 2018)
Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width="1/1"][vc_column_text]
Source: CMC Markets, 13 September 2018
Will Barclays return to 2018 high of 220p (+25%) or fall to October 2016 lows of 164p (-6%)?
Broker Consensus: 50% Buy, 38.5% Hold, 11.5% Sell
Bullish: HSBC, Buy, Target 270p, +54% (18 August 2018)
Average Target: 222.1p, +26% (13 September 2018)
Bearish: Day by Day, Sell, Target 139.28p, -21% (3 September 2018)
Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row]
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Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.
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While buying 9,561 shares in IQE @ 104.58p requires an outlay of around £10,000 plus commission, the same exposure via a CFD requires about £2000 plus commission (see right-hand box; margin + costs). If a trader invests in IQE, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to IQE shares - some of that capital could be put to good use elsewhere in the markets. (Source: CMC, Prices indicative)
If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up as little as 20%/£2000 (note that overnight financing costs will still apply). The remaining £8,000 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty![/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width="1/1"][vc_column_text]
Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.[/vc_column_text][/vc_column][/vc_row]
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Prepared by Michael van Dulken, Head of Research