Analysis: Two Major Bitcoin CFD Providers Raise Red Flags on SNB-Type Event

The relentless Bitcoin buying frenzy we are witnessing is starting to get some brokers providing crypto CFDs to retail traders worried. IG Group has shared with the FT for a recent piece that it is limiting its exposure to Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term.

The firm has been on the market since 2013 when it started offering Bitcoin CFDs. Until recently it didn’t face any barriers in providing its clients with exposure to the asset, but the firm is getting uncomfortable with the levels of risks.

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The CEO of IG Group, Peter Hetherington elaborated on cybersecurity risks to the FT, “We have strict internal hedging limits on certain exotic products — principally cryptocurrencies — to determine how much of the underlying asset we are exposed to [and] avoid risks we’re not comfortable with.”

“Where we get close to reaching those limits, we stop taking new positions,” Hetherington explains.

The company proceeds to highlight that clients of IG are always able to close their positions. The internal limits that the brokerage set up for holding Bitcoin assets are at tens of millions of pounds.

Just like CHF, Crypto Market Risks are Greatly Under-appreciated

With client demand driving brokers to take on more exposure on the long side, any sudden interruption in the market opens the floodgates to an SNB-style event. Remember how we highlighted in September 2014 an increasingly one-sided positioning from retail traders in EURCHF?

Several months before the SNB event, Saxo Bank was the first to raise a red flag and was quickly followed up by GAIN Capital. While that didn’t prevent the Danish firm from losing big during the SNB, imagine what the result would have been if the brokerage didn’t cut its exposure to the one-sided bet.

Plus500 Interest Rates and Bitcoin Cash Debacle

Another company that is raising a red flag is Plus500. The firm is charging a draconian 175 percent annual interest rate on holding crypto CFDs overnight. The level is discouraging clients from holding such positions open over long periods of time.

With recent price volatility, the overnight exposure can be tolerated for a couple of days, maybe a few weeks tops for the braver ones. The risks to brokers arising from cryptocurrency trading already became apparent when Bitcoin Cash spiked higher earlier this month.

Commenting on the risks from crypto, a spokesperson of the London-headquartered CFD Compliance Forum, said: “FX and CFDs brokers are facing significant challenges managing their risk in virtual currencies. It was evident during the recent Bitcoin Cash spike that cryptos are in fact extremely volatile and with uneven trading conditions and directional bets.”

“The sooner there are alternative and supporting venues to mitigate exposure, the better it will be to harmonize and evolve this asset class. Otherwise, we can say major initiatives coming to play from regulators as brokers are playing with fire and there's no water hose in near sight,” the spokesperson elaborated.”

In the meantime, IG Group does not guarantee to its clients that it will take their orders on cryptocurrencies. And rightfully so, since the Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place Read this Term issues that resulted in the aftermath of the SNB crisis have materially affected the industry for years ahead.

Mark November 2017 as the first time when you were officially warned about crypto volatility risks. I am pretty sure that it won’t be the last one.