Cryptocurrency Trading in Binary Options

As Bitcoin gains prominence, more and more traders add the cryptocurrency to their watch list and take positions in the market to benefit from the price volatility. The positions are taken either through a dedicated cryptocurrency exchange or through a broker offering CFDs (contracts for difference) or binary options. Basically, the binary option contracts offered to trade any kind of asset, irrespective of whether it is a fiat currency or digital currency, is the same. However, there lies an ocean of difference between the manner in which a digital currency and a normal currency are traded by a binary options trader. The following discussion throws a light on major differences between cryptocurrency and fiat currency trading.

Trading hours

Normal currencies are offered for trading from Monday morning till Friday evening. On the other hand, Bitcoin, a decentralized currency, is offered for trading on a 24×7 basis (as the underlying asset trades on dedicated exchanges even on weekends). This means that a trader who is working full-time will also have an opportunity to trade binary options during the weekend. This is one of the major differences between Bitcoin and fiat currency trading. It should be noted that as more and more people start trading during weekends, other popular cryptocurrencies such as Ethereum, Litecoin, Dogecoin, Dash, and Ripple may find its way in the binary options trading platform.

There are some binary brokers who do offer normal currency or stock related contracts even on weekends. However, they are long-term contracts which allow only a trader to enter based on a predetermined level. Such contracts will expire on any other business day of the week or month and not on the same day.

Government interference

Both cryptocurrency and fiat currency traders normally look for news related to government interference. However, in the case of a normal currency pair, the interference, if any, would be from the central bank of the respective country. To manage inflation or prevent deflationary risk, central banks modify interest rates to ensure a soft landing or boost economic growth. A rise in the interest rate strengthens a country’s currency, while a cut in the interest rate weakens it.  Thus, based on the central bank’s decision, a binary options trader would purchase a call or put option to benefit from the rise or fall in the exchange rate of a currency.

On the other hand, announcement related to cryptocurrency from any developed or emerging economy will affect the price (exchange rate). The value of a cryptocurrency is dependent mainly on its global acceptance. Any decision threatening the free use of the cryptocurrency for business or shopping purposes would trigger anxiety among traders. This would ultimately increase the selling pressure. For example, the NYFDS “BitLicense” proposal (license for using Bitcoin in the US state of New York) created a sense of fear among the traders. This prompted several Bitcoin traders to sell the holding through an exchange or purchase a put option contract.

Similarly, attempts to increase capital controls in a developed or emerging economy will usually create demand for Bitcoin. As the Chinese economy started slowing down, the country brought in various capital controls to restrict capital flight. This boosted the demand for the Bitcoin and other cryptocurrencies.  Not all the cryptocurrencies behave in the same manner. Some of them have a direct correlation with the fiat currencies, while there are others with inverse correlation. For example, Litecoin tends to have a direct correlation with the US dollar. On the other hand, Bitcoin has a slight negative (from June 2014) correlation with the US dollar. A binary options trader who possesses knowledge about correlations will find it easy to take cryptocurrency trading (binary options) related decisions. It should be remembered that the correlation is not very explicit as the cryptocurrency market has a long way to go.

News

While trading a normal currency pair, a binary options trader would monitor the economic and political news. If the economic data is positive for a particular currency, then a call option would be accordingly bought after assessing the support and resistance levels.

If the traded asset is a cryptocurrency, then the binary options trader would look for news related to mining and dedicated exchanges. For example the news of Ghash.io, a mining pool, commanding a 51% share in Bitcoin mining triggered a wave of selling by large holders as they feared mining centralization. Similarly, the crash of Mt.Gox, an online dedicated Bitcoin trading exchange, resulted in a sharp drop in price. Cryptocurrency traders would also look for discussions related to the latest news on websites such as Bitcointalk.org. Other than the positive and negative news related to mining or volume traded in an exchange, traders would also monitor the progress of other cryptocurrencies.

A cryptocurrency, which is well supported by the developers tend to appreciate quickly as the coin would undergo developments that guarantee several facilities including total anonymity. For example, the Ethereum is closely followed by cryptocurrency enthusiasts as it has functionality, which can challenge Bitcoin in the long-term. If it gains popularity, then naturally, the exchange rate of Bitcoin will be affected. Thus, market capitalization and daily traded volume of cryptocurrencies are generally watched to have an idea of the prevailing trend.

Demand and supply

Demand and supply determine the exchange rate of both Bitcoin and fiat currency. However, in the case of Bitcoin, the demand cannot be artificially created and some sort of favorable news can only drive in buyers towards the purchase of Bitcoin or any other cryptocurrency through an online exchange. For example, between October 28th, 2015 and November 4th, 2015, the price of Bitcoin rose from a low of $289.93 to a high of $478.48. Most analysts attribute the price rise to the European Court of Justice’s Value Added Tax (VAT) ruling that Bitcoin should be only deemed as a currency and not as a commodity. The ruling not only ensured that Bitcoin is excluded from VAT, but also took it one more step near to being recognized as a legal tender. The news triggered the demand for the Bitcoin, thereby leading to a sharp rise in the price.

In fact, the sharp rise in the price of another cryptocurrency Ethereum is mainly because the cryptocurrency is now gaining popularity as a better alternative to the Bitcoin. In fact, the cryptocurrency enthusiasts refer to the Ethereum as to the crude oil, and to Bitcoin as to the gold. Even Microsoft introduced Ethereum capabilities to its Azure cloud service. This was soon followed by other cryptocurrencies such as Factom and Ripple. The exchange rate of Factom increased 600% in a very short span of time.

In the case of a fiat currency, a central bank can modify interest rates to create demand. Liquidity can also be increased through measures such as quantitative easing.  So, while trading a normal currency, central bank announcements, which can induce demand or increase supply is usually looked for.  On the other hand, a cryptocurrency trader would monitor exchanges for large block deals and latest developments (discussed in forums like Bitcointalk.org). Using the information, a cryptocurrency trader would purchase a binary call or put option contract.

Most of the binary option brokers who offer the cryptocurrency trading facility accept Bitcoin deposits. The traders can also opt for Bitcoin withdrawals. The Bitcoin address of the trader is usually linked to the corresponding trading account, thereby facilitating quick deposits and withdrawals. Most brokers credit the account, following three block chain confirmations.

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