Going into 2014, there have been four online forex brokers that launched CFD versions of bitcoins for trading. The list includes early adopter Plus500 which also has added litecoins, as well as AvaTrade, eToro, and Markets.com. In addition, there are a bunch of binary options brokers providing short term bitcoin bets, but as binary wagers potential profits are fixed. There have also been at least three technology providers that service the brokerage industry that have created products to allow brokers to offer bitcoin trading to their clients. (On an interesting side point, of the four brokers, they all have connections to Israel, either via their owners or via the use of outsourced sales and marketing firms that provide services for the companies.)
While not an actual purchase of bitcoins, CFDs offer synthetic ownership of the digital currency, with their price mimicking that of bitcoins. For traders, the advantages of trading bitcoins with a forex broker is that CFDs are available for both long and short trades as well as provide leveraged trading. In terms of the above mentioned brokers, they also offer client protection of being regulated financial firms (although there are still risks involved).
Looking ahead, the seeds exist for many more firms to begin offering CFD trading of digital currencies. From a technology standpoint, all that is essence needed is a reliable API feed from a bitcoin exchange that provides tick by tick pricing. With that, the feed can be integrated within a broker’s trading platform servers where it can power trading of CFD.
For brokers though, what is missing are sources of liquidity to hedge risk. While firms are able to open accounts at bitcoin exchanges, the feedback that we have received from several brokers is that they would be hesitant to fund $100,000 plus accounts with unregulated entities. In addition, brokers are able to count a percentage of funds being held for hedging purposes at other financial firms towards their regulatory capital requirements. However, any funds transferred to a bitcoin exchange would most likely have a hard time being accepted by financial regulators as available collateral being held.
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However, as the network of brokers offering trading in bitcoins has grown, it provides new entrants options in terms of hedging. While a broker may not be comfortable holding funds at a bictoin exchange or handling their own digital currency wallets, parking cash at a competitor to handle their hedging may be more reasonable.
Best of Both Worlds?
Beyond the broker offerings, what appears to be the most exciting potential comes from bitcoin exchanges themselves. Partnering with FXOpen, BTC-e launched a MetaTrader 4 version of their liquidity. The offering lets account holders trade with the MetaTrader 4 platform for select digital currencies rather than using BTC-e’s web based order entry system. While the current partnership is based on BTC-e using FXOpen’s technology, we believe we’ll soon see more cooperation between brokers and bitcoin exchanges. Specifically, we won’t be surprised to see a partnership where customers are onboarded by the broker but trade directly with a digital currency exchange’s liquidity. Such a scenario would provide traders the ability to have direct ownership of digital currencies within their overall multi-asset holdings.
Future is Bright
However you break it down, 2014 should be a year where online broker adoption of digital currencies goes main stream. Existing already are efficient technology methods for brokers to create CFDs, while hedging opportunities are slowly going online. The existing example of cooperation between brokers and exchanges is expected to become more expansive which could bring a slate of new trading opportunities for traders at traditional online brokers.