With cryptocurrencies being such an important area of operations for many CFD traders, the recent upheavals in the forex markets have made for interesting times.
With cryptocurrencies being such an important area of operations for many CFD traders, the recent upheavals in the forex markets have made for interesting times. Of course, a big part of the appeal of CFDs is that a fast-moving market with plenty of price fluctuations offers many opportunities for taking a position, but by the same token, too much volatility can open up potential losses as well as high gains.
With Bitcoin and other cryptocurrencies plummeting in recent weeks, and the former in particular causing concerns as it plummeted to nearly hit the $4,500 (£3,500) barrier, what will the short-term future hold for both traders and the markets?
Price fluctuations are the bread and butter of trading in CFDs. as the whole idea is to take positions on the value of underlying assets rather than buy then or take an option to buy them. Swing trading is a fine art that many successful CFD investors have managed to master, and with the crypto sector currently bouncing from optimism to pessimism, there is certainly an atmosphere of unpredictability in the air.
In addition to the much-publicised falls for Bitcoin, rival digital coins Ethereum, XRP and Litecoin followed suit and saw large sums wiped off of their values. As with taking a position using any leveraged product, CFDs offer high reward for low initial outlays in situations such as this. Traders who use technical analysis to great advantage are able to make use of this kind of market situation to move quickly from one asset to another and change positions as circumstances unfold.
Knowing how hard that a price will fall before it recovers is part of long-term trading on stock markets, and it is a skill that can lead to picking up bargains at just the right time.
Terms such as ”resistance level” are often historical markers for how low that a stock might fall before inevitably recovering. For Bitcoin, the $6,000 (£4,700) level has been a hard barrier for some time, which is why the fall to nearer $4,500 (£3,500) came as quite a shock for many observers and investors alike.
Prices fall when assets sell off in great numbers, and the recent hit to cryptocurrencies was probably due to two events, according to many analysts.
The growing feeling that the historic Bull Market run on Wall Street may be running out of steam is certainly a major factor. Whether the so-called ‘Santa Rally’ will give some respite before the end of the year is yet unknown, but for many, the combination of trade wars, corporate earnings ceilings and continued interest rate hikes from the Fed are building up into a pessimistic outlook shared by increasing numbers of investors.
Another factor is the division found among cryptocurrency leaders and developers and the ensuing uncertainty that results. The Bitcoin Cash (BCH) hard fork hasn’t helped and only highlighted the failure to reach agreement on the direction that issues should take.
BCH was supposed to have a protocol upgrade scheduled twice a year as part of its original manifesto. The in-built implication was that of a hard fork where the nodes running new versions cause a protocol change by not being compatible with older ones.
The latest hard fork was due to take place on November 15th but instead saw BCH split into three separate factions. Bitcoin investor Roger Ver believes that BCH worked well and now leads a conservative Bitcoin ABC. Craig Wright, who has declared himself as BTC creator Satoshi Nakamoto, now leads a progressive Bitcoin SV. There is also a neutral consolatory fraction called Bitcoin Unlimited.
The overall effect of these developments has been to undermine some of the confidence that Bitcoin has built up as the poster coin for digital cryptocurrencies, and they have definitely played a role in the recent market volatility.
Some big players are now reviewing their forecasts. One example is Thomas J. Lee, Managing Partner at Fundstrat Global Advisors, who cut his BTC/USD target for the end of the year down to $15,000 (£11,700) from $25,000 (£19,565).
“Crypto-specific events have led to greater uncertainty in the crypto market, including the contentious hard fork for Bitcoin Cash,” Lee said.
Influential crypto trader Hsaka recently tweeted: “$BTC Update. Could be forming a nifty little range here. Swept shortstops and tested range bottom. Swept long stops. Now if price can reclaim the zone around $5,400 [£4,200[, a retest of $5,600 [£4,500] looks likely.”
In terms of the wider forex markets, Brexit continues to impact on the pound and the euro, while major rival currencies such as the US dollar make gains amid the chaos. For cryptocurrencies, the situation is always going to be opaquer, as geo-political events by definition are likely to have less direct impact on their prices.
However, government intervention in terms of regulation of coins and adoption of blockchain tech into its own processes will have knock-on effects that CFD traders should be aware of.