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Leveraged products involve a high level of risk and you can lose more than your original investment. They are not suitable for everyone so please ensure you understand the risks involved and if necessary please obtain investment advice from a financial adviser before investing. This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

17 September 2017

The Bitcoin Report

Unless you’ve been living under a rock, you’ll have likely heard about 2017’s most divisive topic. Cryptocurrencies. Talks of returns in the double or even triple digits have set traders’ tongues wagging, resulting in a significant increase of products available. Even Paris Hilton has jumped in on the act, recently endorsing a US coin offering.

With financial websites awash with news about cryptocurrencies, this report will focus on the currency that started it all, Bitcoin. We’ll answer questions such as what it is, what it can be used for, how you can trade it and whether it is a feasible investment. By the end of the report, you’ll be able to decide whether it’s boom or bust.

 

What is Bitcoin and what is it used for?

Bitcoin is the best-known example of a cryptocurrency, a virtual and de-centralised currency whose transactions are performed without the need for a central issuing authority – a bank, in most cases. In 2009, a programmer under the pseudonym Satoshi Nakamoto published the specification and proof of what became Bitcoin. Since then, it has become the world’s most popular cryptocurrency, inspiring others such as Ethereum and Ripple.

To obtain one, you would need to ‘mine’ a Bitcoin by authenticating a series of bitcoin transactions that are then recorded onto a central ‘blockchain’. Once you have completed these, and they have been confirmed by a peer-evaluated system, you are then rewarded with a number of Bitcoins. While this was once a relatively simple process, the number of authentications that need to be completed for a single block has increased exponentially.

While physical Bitcoins have limited use today – mainly for online transactions – traders can speculate its value in a similar way to regular currencies, a popular trade that has seen Bitcoin rally as much as 300% this year.

 

Why has Bitcoin increased in value so much this year and will it continue?

The 2017 cryptocurrency rally has come about after a surge in fundraisings called Initial Coin Offerings, or ICOs. While an IPO raises money through public listing, most commonly an ICO raises money for developers by offering tokens in return for a future stake in the currency being developed. So far ICOs have raised $1.8bn in 2017.

However, investors are seemingly falling out of love with Bitcoin, if only a little. China has ruled ICOs illegal, while JP Morgan’s CEO has very publicly claimed that Bitcoin is a fraud, resulting in the crypto poster child falling up to 30% from its highs. With ICO investigations in the both UK and US ongoing, investors are spooked. However, as blockchain technology becomes increasingly popular in mainstream finance, with the world’s largest financial institutions dedicating vast resources to research it, Bitcoin could play a key role in this new world.

 

Over the page, we analyse the investment opportunities in Bitcoin, including just how you can trade it.

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Bitcoin (BTC)

Will Bitcoin rally back to highs of $5000 (+49%) or fall to July 2017 lows of $1800 (-46%)?
  • In 2017, the price of a single coin has rallied from around $1000 in January to highs of almost $5000.
  • However, the cryptocurrency has fallen by over a third from August’s all-time highs of $4924.
  • Relative Strength Index (RSI) has bounced from near its oversold level
  • Stochastics have turned oversold for the first time since July’s lows
Market commentators are divided on Bitcoin’s future direction:
  • Allianz chief economic advisor Mohamed El-Erian believes it should be worth half of its current value
  • CNBC contributor Brian Kelly, however, believes it is undervalued in the long run

 

Pricing data sourced from ProRealTime Charts on 15 September. Please contact us for a full, up to date rundown.

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How can I invest in Bitcoin and other cryptocurrencies?

While online coin brokers and exchanges claim to offer access to physical Bitcoins, most are unregulated and, therefore, pose considerable risks to investors. However, there are some regulated ways to invest in Bitcoin.

Bitcoin is available to trade through Contracts for Difference or CFDs. While you would not have the physical ownership of one or more Bitcoins, you would be able to speculate on the value of the cryptocurrency in the same way that you would trade an index. Furthermore, this allows you to take either a long or short position on the cryptocurrency, allowing you to the ability to profit from falling prices as well as rising ones.

A position is opened in the form of a contract. A contract means that you stand to profit from movement based in points – for Bitcoin (USD) this entails a single dollar. Contracts are priced at different levels, with a point having different value depending on the size of a contract that you undertake. A maxi contract has a value of $100 per point on a 12.5% margin, while a mini contract is priced at $10 a point but requires a larger capital outlay, a 20% margin. The commission on a maxi contract is £10 in, £10 out, while a mini contract carries a £1 cost each way.

A long position would see profit when Bitcoin increases in value – relative to your per point exposure – while a short position profits when Bitcoin falls. Proportionate losses would be made should it move unfavourably.

Other cryptocurrencies available to trade are limited to Ethereum, however products such as exchange traded funds (ETFs) may offer the exposure to Bitcoin and cryptocurrencies without needing to trade the product itself.

However, trading Bitcoin comes with immense risks. Given the value of Bitcoin is incredibly difficult to quantify effectively, daily movements of 5-20% in either direction on little or no news regularly take place. This makes long-term positions more difficult to support, which has forced Bitcoin traders to pursue short-term strategies.

 

Bitcoin and cryptocurrencies are not for me. What are my other options?

If you’re searching for trading opportunities that have a much lesser tendency to post sharp price movements, then you may be interested in trading indices.

Indices, selected lists of the largest and most traded companies on a particular stock exchange, are traded on a contract basis, however they have a much broader range of influence and drivers than Bitcoin. These include, but are certainly not limited to, corporate news, foreign exchange markets and macroeconomic factors.

As detailed above, indices trade on a per point basis, however one advantage of trading indices as opposed to cryptocurrencies is that the margin required to open a position is much smaller. For example, the UK’s blue chip index – the FTSE 100 – requires a margin of as little as 5%, although this is dependent on trading hours.

Alternative investments that trade on a similar basis include Commodities, including Crude Oil and Gold, and Currencies, such as GBP/EUR, EUR/USD or even a trade-weighted index such as the US Dollar Basket. Like indices, these are subject to a diverse range of influences and, while not subject to the same volatility as a cryptocurrency, can often see daily price movements of up to 5%.

Accendo Markets’ research team puts together daily publications on indices, commodities and blue-chip equities. To discover our award-winning offering, sign up here to have it delivered directly to your inbox.

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Want to take advantage of the above opportunities in Bitcoin right now?

Whether you see Bitcoin 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.

CFDs: Like shares, but more flexible

Stockbroking Ticket

CFD Ticket

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, 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 the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

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 just £500 (note that overnight financing costs will still apply). The remaining £9,500 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!

What’s your view?

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.

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

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