A trading strategy called spread betting is a tax-efficient way to use financial derivatives to speculate on the price movements of a variety of financial instruments. Spread betting is illegal in the United States, Japan and Australia, but it is legal in the United Kingdom, and there is a very active market. Below is a description of bitcoin spread betting, its advantages and an example of a trade.

How Does Bitcoin Spread Betting Work?

A digital currency called bitcoin was created in 2009. It is a currency that is decentralized, has low transaction fees and offers a large amount of anonymity. No physical Bitcoins exist. All balances are digital and are maintained though a computerized public ledger. In the United Kingdom, spread betting is possible on bitcoin. With a bitcoin spread bet, a trader makes a decision on whether he or she thinks the price of bitcoin might go up or go down, and makes a profit or loss based on whether this prediction is correct. The greater the price movement, the greater the profit or loss the trader can realize once the trade is closed.

It is important to note that actual bitcoin is never directly purchased or sold. The spread bet is made by using a derivative contract. If a person believes that the price of bitcoin will increase, a long position (buy) in the spread bet must be opened. Conversely, if a person speculates that the price of bitcoin will decrease, a short position (sell) in the spread bet should be opened.

The amount of money that a person puts on the line for a specified amount of price movement is known as the "stake" of the spread bet. For every point bitcoin moves, the trader gains or loses multiples of this amount relative to the number of points that bitcoin moves. Like all spread betting, a bitcoin spread bet is a leveraged trade. Only a small percentage of the total value of the trade needs to be deposited in order to enter into the trade. Gains and losses are both magnified. Potential profits may be large, but potential losses may exceed the dollar value of the trader's account, requiring further deposits to cover losses.

Benefits of Commodity Spread Betting

Traders interested in spread betting bitcoin never need to actually own the cryptocurrency. This means that they never need to deal with any bitcoin exchanges nor obtain a bitcoin wallet (which is required for those looking to own actual bitcoin). Both obtaining a wallet and engaging with bitcoin exchanges have their own unique risks, and spread betting eliminates them directly. Bitcoin spread betting in the United Kingdom is classified as gambling and, thus, is tax-free. Taxes on bitcoin spread bet profits may exist for international investors, so it is advisable to consult with a tax professional when engaging in these types of trades.

Traders can make bitcoin spread bets directly on the price of bitcoin, but they may also place spread bets on bitcoin currency pairs, which adds another dimension to the bets. The commonly used bitcoin currency code is XBT. Spread bets can be placed on the following bitcoin currency pairs: XBT/GBP, XBT/USD, XBT/EUR, XBT/JPY and XBT/CNH. These trades can be placed 24 hours a day.

Bitcoin Spread Bet Example

There are five steps involved in a bitcoin spread trade. First, look at the current bitcoin bid/ask spread, then speculate on a price movement direction. Next, calculate the stake of the trader per price movement. Fourth, close the trade, and finally, calculate the profit or loss.

As an example, assume that a trader wants to place a bitcoin spread bet. Bitcoin is a leveraged trade, and a $1 bet per point equates to betting on 100 XBT. Assume that bitcoin is trading in the spot market at $600. A trader may see the bid price listed as 59,850 and the ask price listed as 60,150. The trader speculates that the price of bitcoin will increase and decides to go long the spread bet. He or she decides to stake $5 on each point of price movement. Assume some time passes and the new ask price of bitcoin is 62,150 (2,000 point increase). The trader closes out the trade and calculates his or her profit. In generalized terms for a long position, the profit and loss is:

Profit or loss = (settlement price - opening price) x stake

In the above trade example, the profit the trader earns is:

Profit = (62,150 - 60,150) x $5 = $10,000