(ThyBlackMan.com) CFD trading in Singapore can be a great way to start investing for those who fear the volatility and high investment fees of buying stocks directly.
What is a CFD?
A CFD is a contract that gives traders access to movements in the price of an underlying asset without actually owning it. Instead, you make bets on whether its price will rise or fall over time – hence ‘derivatives’. The most prevalent underlying assets include commodities, indices and currencies.
It alone makes CFDs quite popular among investors looking for tax advantages (you do not pay capital gains tax when you sell out of this type of investment) as well as those seeking leverage (margin trading). As such, many retail FX brokers offer CFDs on their platforms.
CFDs in Singapore
Singapore has historically been an attractive market for CFDs due to its extensive foreign exchange (FX) reserves and trade surplus. It is because Singapore’s free-float government debt-to GDP ratio, which is the share of a country’s debt that does not have any financial institution or corporate backing, has typically hovered just below 40% since 2000. The Asian nation also enjoys low inflation rates and accommodative interest rates.
However, regulators worldwide are tightening up regulations surrounding leveraged trading instruments such as CFDs after traders were blamed for exaggerating the sharp falls during last year’s ‘Black Swan’ event in China.
As such, many global brokers will now need more margin money from you if you want to trade CFDs with them, which means tools like leverage are no longer as attractive.
In addition to more stringent capital requirements, regulators have also taken a closer look at the suitability of these products for retail investors by clamping down on aggressive marketing and potentially curbing bonuses related to trading volumes.
Singapore jurisdictions
Certain jurisdictions, such as France, have already banned the sale of trading products that reference Bitcoin due to their inherent complexity and volatility. It has led many brokers to halt or even close their cryptocurrency businesses altogether. While these types of products were previously only available via a small set of more tech-savvy online providers, some old school firms have now joined the fray – albeit with a slightly different approach.
Bitcoin CFD trading
Alternative ways to trade Bitcoin CFD trading are popular among those who want to trade Bitcoin without owning the cryptocurrency. However, since many of these products have now been closed down by regulators or stopped offering them altogether, there are now other ways you can still get exposure.
Bitcoin ETN
Another way to get exposure without actually owning the cryptocurrency is through an exchange-traded note (ETN), a sophisticated instrument that invests in Bitcoin itself but acts like any other currency instrument by tracking price movements and giving you the same benefits as trading FX – just in USD instead of your local currency.
The CXBTF MVIS Bitcoin ETN tracks the price movement of Bitcoin using the MVBTC index as its reference rate. It gives you more transparency than CFDs because you can see precisely how much Bitcoin your ETN is tracking and the risk profile of this product. However, there’s no way to magnify returns without leverage, so that it could be a suitable choice depending on your requirements.
Bitcoin futures
Even though you can’t trade Bitcoin itself, you can still get exposure to crypto by investing in its underlying technology. For instance, some brokers now offer futures based on this underlying asset or even access to a regulated exchange where you could buy and sell actual Bitcoins.
The CME Group allows investors to go long (buy) or short (sell) using its Bitcoin Reference Rate (BRR), which is used to determine the price of BTC futures on its platform. However, while these contracts are cash-settled like CFDs, they’re technically not the same thing because they’re entirely unrelated instruments that reference an entirely different asset class.
Staff Writer; Rick Brown
