Key Post How to bet on Bitcoin falling

[Brendan Burgess]

Warning. I am not recommending that people sell Bitcoin. While I believe that Bitcoin is worthless, it may rise significantly before it falls to zero. If you bet on it falling, then you could face large losses.

But if you do want to place a bet and can handle the potential losses, then here is how to do it.

I had hoped that Betfair or Paddy Power would give a straightforward bet on a long-term fall in the value of Bitcoin. Paddy Power were offering 7/1 on it being worth less than $8,000 by the end of 2018, so I piled in only to find the maximum bet that they would take was €30. I had looked for a simple long-term sell option, but they don't seem to be available on any credible exchange. While you can sell futures, the longest is settled in 6 months, which is too short a period.

In case anyone else is interested in doing it, here is how it works. I have placed the smallest possible bet on Bitcoin falling.

I sold .03 of a Bitcoin for 14,351.83

The first priority is to limit my risk, so...

I have set up a guaranteed stop 10,000 points above the price I sold at.

So if Bitcoin rises to $24,351.83, then my position will be automatically closed out and I will lose

10,000 @.03 or $300. So my maximum loss is $300.

As a new customer, IG Index demand a margin equal to my maximum loss. So that is $300 or €251.69.

The price rose a bit and then fell a bit. The price at close of business yesterday was $14,219.13

So my profit at the moment is:

Selling price: $14,351.83
Less buying price: $14,219.13
Profit per unit: $132.70
Number of units: .03
Actual profit: $3.98

I can cash that today and get my $3.98.
Or I can let it run and close my position when I am happy with the profit or too worried about the losses.

Brendan

 

[Brendan Burgess]

The most important issue to decide is how much you are prepared to lose.

In the above example, I have set my limit at $300 - so that is a rise of $10,000.

In a more substantial bet, I would allow for a rise of $20,000 in setting my limit.

So, let's say I decide to sell one Bitcoin when the price is $14,000.
I will set my limit at $34,000.
If Bitcoin rises through that, I will lose $20,000.

[In practice the maximum initial stop is 10,000. However, if Bitcoin rises by 5,000, you can simply increase your stop by 5,000]

So if I am prepared to lose $100,000, then I could sell 5 Bitcoins.

If I am only prepared to lose $10,000, then I can only sell 0.5 of a Bitcoin.

Alternatively, if I am prepared to lose $10,000, I could sell 1 Bitcoin, but would have to set the guaranteed stop at $24,000.

 

[Brendan Burgess]

The costs involved

For a long-term holder of a sell spread bet on Bitcoin, the costs are quite low.

The spread is 120 points.
So if Bitcoin's price in the market is $14,060

• The sell price is $14,000
• The buy price is $14,120

So if I sell a coin at $14,000 and the price does not change and I want to close the position, then I would have to buy it back at $14,120, so I would lose $120 on the deal.

Cost of financing

If you Buy Bitcoin, you have to pay an overnight financing cost of around 35% a year.
But if you sell Bitcoin, as I have done, you will be paid a financing cost of around 7.5 % a year.

From IG website.

So £14.42 x 365 = £5,263 +120 spread = £5,380 /$16,200 = 32.5% total holding costs including the spread.

 

[Brendan Burgess]

How to place a spread bet.

It's actually very easy. It took a couple of hours for them to approve the account. Then I transferred in €1,000 from my debit card.

When you are good to go, you will be faced with this screen:

So choose the size of your bet e.g. $1 per point is the equivalent of selling 1 Bitcoin.

Set the Guaranteed Stop.

The Limit is the limit on my profits – e.g. I could set this at 10,000 away from from my selling price. If Bitcoin falls to $3,636, my position would close automatically and the profits would go into my account.

Ignore: “Net off” and “force open”. They are for people who have both buy and sell trades open at the same time.

 

[Brendan Burgess]

Spread Betting or Contracts for Difference

From what I have been able to gather, the pricing on both is the same. The same spread of 120 points and the same financing costs.

The key difference is that spread betting is regarded as gambling and so any profits will not be subject to taxation of any kind.

A CFD is treated as an investment. Any profits will be subject to Capital Gains Tax.

For my one off Bitcoin trade, spread betting is the way to go as I expect to win.

However, I will regret this if I lose. Had I opted for a CFD I could at least set the losses against capital gains on my shares.

Brendan

 

[RichInSpirit]

The key difference is that spread betting is regarded as gambling and so any profits will not be subject to taxation of any kind.

A CFD is treated as an investment. Any profits will be subject to Capital Gains Tax.

If you are successful at it Brendan and make tonnes of money, the taxman could take an interest in it under "Badges of a Trade" law.
The tax treatment of winnings or profit isn't crystal clear in Ireland.
It is clearer in the UK.

 

[Brendan Burgess]

Hi Richie

My plan would be to place a once off bet for a once off gain or loss.

I would not intend to be betting on other markets.

Brendan

 

[Duke of Marmalade]

First of all a minor correction, you shouldn’t have added the 120 in that calculation.

I don’t think you get funding on your margin and I also don’t think you have any discretion on the size of your margin.

The 25% is a complete mystery to me. On an instant chat session I was told it was their cost of funding but that doesn’t make sense. For a normal Forex spread like €/$ the funding is based on the current swap rates and is practically zero.

 

[Brendan Burgess]

Hi Duke

Can someone spread bet on buying Bitcoin without incurring the funding costs?

If so, maybe the 120 spread would be worthwhile? IG Index would be a lot more secure for most people.

Brendan

 

[Duke of Marmalade]

Hi Duke

Can someone spread bet on buying Bitcoin without incurring the funding costs?

If so, maybe the 120 spread would be worthwhile? IG Index would be a lot more secure for most people.

Brendan

I don't think so.

As I say I don't understand the funding costs being 25%. Imagine they only had one punter and she was long bitcoin versus the dollar. IG do not take positions (other than very temporary) so they would have to buy the bitcoin in the market and they would have to borrow dollars to do so. But I would have thought that IG could borrow dollars at much less than 25%, in fact I know they can because they charge practically no funding costs for $/€. What I am thinking is that in some way their borrowed dollars in the above situation are collateralised by the bitcoin and the lender is charging a whopping interest rate for that. It also suggests to me that most punters with IG are longe bitcoin versus the dollar, making IG a substantial holder of bitcoin.

 

[Brendan Burgess]

It also suggests to me that most punters with IG are longe bitcoin versus the dollar, making IG a substantial holder of bitcoin.

Hi Duke

This is correct. When I spoke to them they told me that most are long on Bitcoin and there are very few short sellers. They often restrict people going long because they have used up their capacity. They told me I would have no problem going short.

Brendan

 

[Duke of Marmalade]

OK, I have discovered a problem with my grand plan.

I put in a guaranteed stop 10,000 above where I was as a test.

When I went to place a large sell bet today, I tried to put in 20,000. But I couldn't. 10,000 above the current price is the max.

Not sure if that is a problem or not. For example, if the price today is 13,000 and I put in a stop at 23,000. If it rises to 18,000, can I increase the stop?

Brendan

You can always close a position and open a new position, though you will lose the spread.

I know the presence of a stop loss is a great psychological crutch. But suppose you are prepared to lose 20,000 (units) I think even for bitcoin that is unlikely to happen in a day. So you could start at a naked position and only if your max loss comes dangerously within sight would you close and reopen with a stop loss.

 

[Brendan Burgess]

OK, so I sell at $14,000 with the maximum stop loss of +10,000. It rises to $24,000 - the stop loss sets in and I lose $10,000.

I then sell at $24,000 with a stop loss at €34,000 - it rises to $34,000 and I lose my bet.

So it works out the same. Grand.

Brendan

 

[Duke of Marmalade]

OK, so I sell at $14,000 with the maximum stop loss of +10,000. It rises to $24,000 - the stop loss sets in and I lose $10,000.

I then sell at $24,000 with a stop loss at €34,000 - it rises to $34,000 and I lose my bet.

So it works out the same. Grand.

Brendan

Don’t wait till stop loss kicks in, that will cost you 20

 

[Brendan Burgess]

OK

So I increase the stop loss when it approaches 10,000 and so there is no cost to me.

I have to just put up more margin.

Brendan

 

[fpalb]

Hmmm so is this really a tax-free way to short bitcoin while being paid interest that might offset the spread (120 points is not too bad anyway)? Are you sure the interest rates are fixed, or can they change while your position is open?

If it's as good as it looks I'll be looking into this myself as an alternative to selling btc. I'll be looking for both higher entry and exit points than you though.

 

[Brendan Burgess]

Hi FP

That is very interesting. The interest is a little kicker for the short sellers, but isn't really material. At 32.5% it's huge for the buyers.

Say you already own a Bitcoin "worth" $14,000 and feel that it's overpriced.

You sell one on IG for $14,000


If it falls to zero - you lose a taxable $14,000 (assuming you paid close to zero for it) but gain a tax-free $14,000

So if you have it and think it's going to fall, then sell it on IG. Brilliant.

The downside is that if it rises to $24,000 , you gain a taxable $10,000 but lose
$10,000 real money.


Brendan

 

[Duke of Marmalade]

Hmmm so is this really a tax-free way to short bitcoin while being paid interest that might offset the spread (120 points is not too bad anyway)? Are you sure the interest rates are fixed, or can they change while your position is open?

If it's as good as it looks I'll be looking into this myself as an alternative to selling btc. I'll be looking for both higher entry and exit points than you though.

Absolutely the interest can change. A week ago they were charging both shorts and longs interest, I think

 

[Duke of Marmalade]

Hi FP

That is very interesting. The interest is a little kicker for the short sellers, but isn't really material. At 32.5% it's huge for the buyers.

Say you already own a Bitcoin "worth" $14,000 and feel that it's overpriced.

You sell one on IG for $14,000


If it falls to zero - you lose a taxable $14,000 (assuming you paid close to zero for it) but gain a tax-free $14,000

So if you have it and think it's going to fall, then sell it on IG. Brilliant.

The downside is that if it rises to $24,000 , you gain a taxable $10,000 but lose
$10,000 real money.


Brendan

The way to look at it is that if you hold 1 bitcoin which you got for next to nothing, then your equity is current price x (1 - CGT rate)
To hedge that on IG you would short (1 - CGT rate) bitcoins. If you short a full bitcoin then you have moved from a long position to a short position = - current price x CGT rate

 

[fpalb]

Absolutely the interest can change. A week ago they were charging both shorts and longs interest, I think

Thanks, I know in general how shorting works, I'm just more curious about the specifics of this IG product.

Maybe I just need to research this myself, but if you know off the top of your head, how often does the interest rate change? what determines whether shorts are getting a -/+ rate? Is it just based on whether the bids/asks are diverging from 'spot'?