If you are tempted to enter the Bitcoin frenzy, do yourself (and your trading account) a favor and trade limited-risk Nadex Bitcoin binary options, instead of the digital cryptocurrency itself.
By James Ramelli
Tuesday, September 20, 2016
Bitcoin is an instrument that most traders are familiar with but very few understand. Bitcoin is a purely digital asset that can be used as a payment system just like standard currency. The value of Bitcoin fluctuates against other major currency pairs creating opportunities for speculative traders who have an opinion on movement in the Bitcoin markets. Bitcoin attracts attention after large moves, particularly in the value of Bitcoin against the US dollar. In early August a warning issued by the IMF in regards to Chinese corporate debt levels combined with broader concern over global risk caused traders to rush into the digital currency. In the previous month, July, investors had bought, then dumped Bitcoin in reponse to drop in the stock market, followed by a recovery. Many view Bitcoin as a safe haven trade like gold, a place to keep your money when the stock market looks bearish.
The BTC/USD exchange rate has rallied nearly 10 percent in September and nearly 30 percent from the early August low, prompting speculative traders to take interest in Bitcoin. However it is not as simple as buying stocks or options to speculate on Bitcoin. Traders must deposit funds on an exchange that is specifically for trading Bitcoin. For traders with smaller accounts this can be prohibitive. If a trader has an account that they use to trade stocks, futures, options and currencies it can be difficult for them to remove funds to dedicate to trading Bitcoin. The volatility in these markets can also be more than most traders can handle. BTC/USD can move very quickly, as made evident by recent events, so an under-capitalized trader might be forced to take on more risk than they should be. Luckily for them Nadex offers binary options that settle based on the price of the Tera Bitcoin Price Index. This index acts as a benchmark for the global Bitcoin exchange rate against the dollar. Trading this index, rather than individual pairs on exchanges, also solves the problem of a very fragmented BTC market place. These contracts also offer all of the risk and reward benefits of binary options. Let’s look at a trade setup:
The Tera Bitcoin Price Index is trading at 608.48. You think the market is headed upwards and you expect it to be above 610.50 by 3PM.
A trader who wants to get long Bitcoin through the end of the day can use daily binary options, which expire at 3PM:
Trader Buys the Tera Bitcoin Price Index > 610.50 Daily Binary Option for $30
Risk: $30 per contract
Reward: $70 per contract
This trade offers a trader a better than one to one reward to risk ratio and also gives them a defined level of risk and reward. It does not matter what happens to the underlying market between now and expiry, this trade will always have these risk and reward dynamics. This type of setup allows traders to speculate in an extremely volatile market using limited risk and a much smaller amount of capital. If you are a trader who is tempted to enter the Bitcoin frenzy, do yourself (ad your trading account) a favor and opt for binary options.
This information has been prepared by Nadex, a trading name of North American Derivatives Exchange, Inc., prepared by independent third parties contracted by Nadex or reproduced form third party news agencies. In addition to the disclaimer below, the material on this page does not contain an offer of, or solicitation for, a transaction in any financial instrument. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.