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How Bitcoin Spread Betting Works and Its Key Features
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How Bitcoin Spread Betting Works and Its Key Features

In recent times, especially with the emergence of a new digital asset class, trading has grown considerably. Essentially, trading is about making trades with financial instruments on the exchange and over-the-counter markets for profit. Emerging in 2009, Bitcoin as a new form of money and the digital asset has long been overlooked because its value was negligible. However, in 2017, the cryptocurrency market boomed, and the price of BTC – as well as some other cryptocurrencies called altcoins – rose significantly.

As a highly volatile asset, Bitcoin could both skyrocket and fall. And that opened up great opportunities for speculative trading. On the other hand, to sell an asset at a profit, you have to buy it in the first place. Although today BTC is far from its peak value fixed in 2021, it is still quite an expensive financial tool, and not everyone can afford to buy it. Luckily, there are plenty of other schemes to make money on variable BTC prices, with Bitcoin spread betting (SB) being one of the most promising. So, read on to find out what Bitcoin SB is and how it works.

What is the Spread from a Cryptocurrency Trading Perspective

In simple terms, the spread is all about the difference between the bid and ask. The ask is the quotation of the currency pair, i.e. the purchase price at which the dealer accepts orders to buy Bitcoin assets from traders. Bid in turn corresponds to the price at which the dealer accepts orders to sell assets. The key difference from traditional stock trading is that you get to speculate on the volatility of an asset, i.e. whether or not Bitcoin (or any other asset) will rise in value. The important feature of spread betting is that you use a derivative strategy instead of investing directly in a digital asset. While our purpose is to explain to you what Bitcoin SB is, it would not be out of place to say that this trading scheme is also used for certain other assets like CDFs, commodities and others. However, if you are targeting Bitcoin specifically, here are a few important things you should be aware of:

  • Bitcoin is best suited for SB because its price can fluctuate significantly over a short period of time.
  • If your bet (forecast of where the price will move) is correct, you can earn a significant amount of money.
  • In most European countries, including the UK, Bitcoin spread betting is considered a form of gambling. And because winnings from online gambling are not taxed, you won’t have to pay tax on your profits from BTC spread betting either.

Note that BTC spread betting is considered illegal in some countries including Australia, Japan and the US. One of the reasons why SB is banned is the still poor spread of Bitcoin and other cryptocurrencies. However, given that the number of BTC users is growing rapidly, chances are that SB will be legalized in the aforementioned countries as well.

How Bitcoin Spread Betting Works

So, the main feature of SB is that you don’t have to spend your money to buy the asset at which price you will speculate on. This is especially good if you want to try your hand at BTC spread betting since the price of the underlying asset is quite high. Additionally, it means that you do not have to worry about holding and securing your bitcoins. The fact is that so-called cold wallets for secure token storage are very expensive. If you choose a hot wallet, i.e. software that interacts with the World Wide Web on a regular basis, there is always a risk that your crypto coins will be stolen. Thus, not having to buy BTC tokens is an important advantage. So, let’s look at how spread betting works step by step:

  • Choose a digital asset for spread betting. Given that BTC is a high-value cryptocurrency (aka digital gold) of a highly volatile nature, it could be an excellent choice.
  • Pick a platform for speculation on asset value. The use of the word “betting” instead of “trading” is because it is more like betting on sports or gambling, as a lot depends on chance (no one can predict exactly where the price of an asset will move).
  • Now focus on studying market trends, and check out the latest news and insights. If you think Bitcoin’s value will increase, you should open a long position. Otherwise, go short.
  • Decide what stake you are willing to place, i.e. how much money you can afford to lose if your luck runs out.
  • Determine when to place stop-loss and take-profit orders so you can manage your risks wisely. Knowing how to go out on time is an important skill that will allow you to avoid taking big financial losses.
  • Finally, close the position (place a trade). You can do this at any time if the spread betting platform of your choice has not set any limits.

So, it’s time to calculate your profit. To do this, simply subtract the settlement value of the asset from the price when you opened the position and multiply that number by your stake.

Bitcoin Spread Betting on Example

So, using the word “spread” in this scheme is explained by the fact that you need to find the difference (spread) between the bid and ask. And while we explained step-by-step above how SB works, let’s take a further look at this process with an example. Note that cryptocurrency platforms specify XBT, an alternative ticker symbol for BTC. Because XBT (Bitcoin) is a high-value asset, you will be given leverage to make a stake. Note that a $1 bet per point corresponds to a stake on XBT 100. Assuming that the asset trades on the spot market at $300. You can set the bid at $29,100 and the ask at $30,200 respectively. Let’s say you believe the value of the coin will rise in the future. Then you need to open a long position. For example, you are willing to bet $2 on each point of price movement. Suppose, after some time, the ask goes up to $31,650 (a gain of 1,450 points). This could be a great moment to close the trade. So, let’s calculate how much profit you made. Simply subtract the opening price (ask) from the settlement price and multiply the obtained value by your stake, i.e. profit = ($31,650 – $30,200) x $2 = $2,900.

Pros & Cons of Bitcoin Spread Betting

Essentially, it is a high-risk form of trading, and you should be aware of all the risks before trying your hand at something new. Firstly, you should be aware that the stake you have funded might not play out and you will lose your money. However, because the platform gives you leverage, you can start with a relatively small stake. And if you have a high-risk tolerance, spread betting can be a great option for a good passive income. So, let’s look at the key benefits of this trading scheme:

  • You are given leverage. This means that you do not have to spend a lot of money to buy an asset. Even a relatively low bet can translate into good profits if the price of an underlying asset changes significantly.
  • Low extra costs. When you buy and sell digital assets, you incur serious transaction fees. However, in terms of extra fees, SB is one of the least expensive forms of trading.
  • You do not have to pay any taxes on your profits. If you are a resident of a country where spread betting is considered a form of gambling, you do not have to pay tax on your winnings.

Because of their high volatility, cryptocurrencies are good for speculative trading. However, price volatility can also play a cruel trick on you. So, while leverage allows you to make substantial profits, if your betting fails, your losses can be significant. Therefore, you should make thorough research of the market in order to understand how the price will move in the near future and what are the preconditions for that. From this comes the second drawback of Bitcoin spread betting – you need a deep understanding of the market processes to succeed. By deciding to bet on the changing price of Bitcoin or altcoins without proper knowledge, you turn speculation on asset’s price into a form of gambling where everything depends only on chance.

Spread Betting Compared to Option Trading

From the foregoing you must conclude that SB contradicts the nature of other forms of trading, such as options trading, securities trading or stock trading since the latter imposes physical obligations and responsibilities on you. As for Bitcoin spread betting, it’s all about betting, and therefore this activity is recognized as a form of gambling in the UK and some other countries. Essentially, SB is pretty much the same as betting on sporting events, with the difference being that instead of betting on the outcomes of, for example, football matches, you are predicting whether the value of an asset will increase or it will go into a bearish trend. Stock options – on the other hand – are contracts that give you the right to buy an asset (a stock) at a fixed price, irrespective of how the price of the stock changes in the future. That is, by trading options, you are dealing with real contracts that give you the right to trade (buy and sell) an asset, for example, on the platform J2TX. So, spread betting and options trading are completely different activities by their nature.

F.A.Q.

1. What is spread betting?

It is a type of trading where you bet on whether the value of the underlying asset will rise or fall in the short term. Unlike options trading, SB does not involve buying the underlying asset. Instead, you invest your money in a bet that might either play out or not.

2. Is spread betting legal?

The legality of SB is determined by the legislation of each country separately. Thus, the list of countries where spread betting is illegal includes the USA, Japan and Australia. However, in many European countries, this activity is accepted as a form of gambling and considered legal.

3. What is Bitcoin spread betting?

It is essentially a form of betting where you predict whether the price of Bitcoin as an underlying asset will rise or fall. Bitcoin is a great option for SB because it is a highly volatile digital asset. This means that the price of BTC can change significantly in short periods of time.

4. What are the risks involved?

The main risks associated with SB stem from the fact that it is essentially a form of gambling. In addition, if you are interested in BTC spread betting, you must be aware that Bitcoin is a highly volatile digital asset. No one can predict exactly how the price of BTC will change in the near future, so the element of chance is an important factor here.

5. How do I choose a reliable broker?

Before you choose a platform, keep in mind that the broker receives a percentage of your winnings as commission. However, not all brokers are fair. Before you join a particular platform, find out about its reputation through reviews on thematic forums.

6. Do I have to pay taxes on profits from spread betting?

In countries where this activity is considered legal, it is treated as a form of gambling. Generally, gamblers and bettors do not pay tax on winnings in online casinos, unless they are classified as professional gamblers. And this rule of taxation applies to those who do Bitcoin SB. That is, in simple terms, spread betting is a tax-free activity.

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