Think Markets Blocks Trading on Crypto CFDs, Amid Risk Management Concerns

Some brokers are backing down from cryptocurrencies, due to risk management challenges and a one-sided market.

Think Markets announced several changes that will impact investors of cryptos at the brokerage. Effective immediately, the company will stop offering trading on many of its cryptocurrency CFDs. Within the announcement, it was stated that “pricing and trading will resume upon the return of liquidity and price stability,” suggesting that these are among the factors contributing to the decision.

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Among the most commonly known coins that are no longer available for trading are Bitcoin, Ethereum, Litecoin, IOTA, and Monero. In the event that liquidity and price stability concerns subside and the company reopens trading on these assets, the trading conditions will not be the same as before.

Changes to contract specifications include limited leverage and capped exposure. Maximum leverage on Bitcoin on all future positions will be 5:1, while capped at 2:1 for all other cryptocurrencies. Meanwhile, the maximum holdings per trader have been modified to 5 contracts of Bitcoin and Ethereum, and 3 contracts for all other coins.

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Cause for Concern

The crypto market is widely known for its high volatility levels. It is one of the underlying reasons for the attractiveness of the virtual coins to the average retail investor. Traders are searching for new paths toward prosperous investment opportunities, leading FX and CFD brokers to quickly adjust to the new demand.

As recently reported by Finance Magnates, brokers are beginning to shut down crypto CFDs as a result of a generally one-sided market. While it is generally a good idea to accommodate growing demand for any tradable asset, it has become an obstacle to maintain proper risk management practices for cryptocurrencies, as many retail investors are simply buying and holding long positions.

This strategy has been very lucrative over the past year, amid the substantial gains seen across the market’s leading coins. As long as many of the virtual coins continue their relatively unwavering ascent in value, it will remain difficult for brokers to accommodate their clients’ demand without effective risk management channels and procedures.

Managing the Risk

Another challenge brokers are experiencing involves capping their risk, due to high collateral requirements brought forth by the CME Group and CBOE. It has reached a point where it simply is not a feasible process for brokers, since they would correspondingly need high collateral requirements from their traders as well.

While some brokers have only recently started to offer CFDs on cryptocurrencies, early entrants of the market have begun to dramatically scale them back, if not block crypto trading altogether. The fast changing landscape of the market could lead to a solution that would alleviate concerns held by brokers regarding crypto CFDs.

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