Who said the crazy speculative days of 2007 were dead and buried.
The virtual currency in question is of course Bitcoin (what else?) and the binary trade has been set up by IG Markets.
David Jones, chief market strategist at IG Markets, said the trade had been set up because the firm had received calls from customers asking for some way to speculate on Bitcoin.
Before now Bitcoin has been covered on the front page of the Financial Times “Buying frenzy sends virtual currency on way to becoming next bubble”, and featured on the BBC website’s technology page.
Ridiculous rise
The market has soared recently, with a 300%+ rise in its ‘value’ fanning the flames, Jones explained.
He said the firm had run a binary trade on Facebook in the time leading up to its IPO and saw quite a lot of volume coming in. IG Markets will have a better idea by mid-week of the appetite for such a trade on Bitcoin.
“Binary bets are a little bit different from the normal spread bet. It is a market that settles between zero and 100 based on whether an event happens or not.
“For example, we have a binary for Bitcoin to be above $200 by the end of May. That binary is currently trading at 40 to buy so if you thought this was going to happen you could buy for example £5 a point at 40.
“If at the end of May Bitcoin is above $200 (the event is true) the binary will settle at 100. So the profit would be 100 – 40 x £5 per point = £300. If the Bitcoin was below $200 the binary settles at zero so the loss is 0-40 x $5 = -£200. Clients can trade the binary in both directions, if they do not think the Bitcoin will be above a certain level they can sell,” Jones explained.
Not the first
Bitcoin is currently trading at around $181 but it is extremely volatile. It is also not the first of such experiments to veer away from government-backed and controlled currencies.
Remember Flooz? At the height of the dotcom bubble it raised $35m from investors and was fronted by an ad campaign containing well-respected investor Whoopi Goldberg. It went bankrupt in August 2001.
Beans was another virtual currency that vanished into the ether.
“The history of an alternative currency is that they do not tend to last very long,” Gary Reynolds, CIO at Courtiers said.
“Some more extreme economists have argued you should let banks create their own currencies, but if one goes bust you are left holding a heap of rubbish and once you lose confidence in a currency the system collapses.”
Of course it is arguably the risk of real currencies losing value through QE-driven inflation combined with the ability to keep Bitcoin out of governments’ grubby fingers (unlike the euro in Cyprus) that has propelled the currency’s value of late.
“This is not a real market and is a riskier one for us, but there is enough pent up demand there from clients,” Jones said, “There are plenty of people who think it is a bit of a bubble, and I would agree with them. But if clients think it is a fad they can sell.”
Yap stones preferable
Reynolds recalled the most bizarre currency he has ever come across, from the Island of Yap, which traded large donut-shaped stones too big to carry with ease.
“I would rather have these than Bitcoin because when they both fail I can at least use my Yap stones as a foundation for a wooden shelter or a decorative ornament, or a large-sized paperweight. I suspect Bitcoin will eventually have no utility whatsoever,” he concluded.
If you feel the same, why not short it. Probably not a big position in any client’s portfolio but a bit of a dig at the computer nerds, which is always fun.
Did you read our article on what acquisition-hungry Bellpenny is looking for in IFA target firms?