Making the New Familiar: Investing in Crypto with CFDs
It was inevitable, perhaps, that it took a global crisis to propel cryptocurrency investment into the mainstream. A stable world was never likely to provide the triggers required to drive investors beyond their comfort zones in sufficient numbers.
The pandemic offered the perfect fertile environment for experimentation and adventure: tens of millions locked down at home with their Internet connections, household savings levels climbing, new retail investor accounts soaring, hunger for alternative investment choices, and traditional asset market performance seemingly untethered from reality as share prices exploded despite teetering economies.
The combined market cap for cryptocurrencies briefly passed US$3 trillion in November[1], and the number of crypto owners almost doubled in 12 months to about 300 million by the end of 2021[2], including massive high-profile investments by companies such as Tesla and Mastercard[3],[4]. According to some forecasts[5], ownership will leap to 1 billion by the end of this year.
Even the marketwide crash early this year–when crypto values at one point slumped by more than $200 billion in a single day, and the overall market cap dropped by $1.3 billion–hasn’t made a significant dent in investor appetite. In fact, compared with the spectacular crashes of the past, a 10% drop in dominant coins Bitcoin and Ethereum barely made a ripple.
The data back this up. Almost one-third of U.S. adults now hold some crypto in their portfolio[6], three-quarters believe digital assets will provide a strong alternative to traditional currencies within the next decade, and surveys suggest heavyweight institutions such as hedge funds and family offices all expect to increase their exposure.[7],[8]
“Shares have traditionally been a gateway product for investors to start their investment journey,” said Kevin Algeo, Head of APAC and Africa at IG Markets. “What we're seeing now – with the growth in cryptos and further mainstream adoption – is individuals and particularly younger investors possibly starting their investment journey on some of the crypto exchanges before they even start trading shares. This creates an opportunity but also comes with responsibility.”
And yet, millions of potential investors who want exposure to cryptos remain wary of committing funds, for several reasons.
Enduring Anxieties
Security is probably the biggest concern of all. To buy crypto directly, investors must go through unregulated exchanges and store purchases in vulnerable “wallets”. The market is still beset by news of high-profile hackings, thefts, losses of “keys”, and other tales of irrecoverable crypto fortunes.
Volatility is another major issue. Wild historical swings in the value of Bitcoin and other cryptos have made many new investors jittery at the prospect of enduring sudden slumps in their portfolio value. This has persisted despite the recent calming of major crypto prices.
In fact, recent research shows that adding 1-2.5% Bitcoin to a 60/40 stock/bond portfolio from 2014-2020 added 1-2.3% to annual returns without significantly increasing volatility.[9]
Knowledge also remains a major obstacle. For many, the idea of an investable asset is inextricably tied to the concept of fundamental value; the belief that share prices, currency rates, commodity futures and bond yields are driven by tangible forces. Cryptos appear to be founded on nothing and driven by whim.
But while there is some truth to this, it doesn’t explain why gold is still one of the world’s most heavily traded assets. It also ignores that fact that, when the world appeared on the brink of economic meltdown in 2009 and 2020, stock markets embarked on historic bull runs.
A price is as much a product of shared perception as it is of concrete value. Many crypto owners also believe their investment is a bet on decentralized finance (DeFi)–an imagined future blockchain-based world in which the global financial plumbing is not under the control of governments and institutional finance.
While this utopian vision is unlikely to unfold entirely, it seems equally unlikely that crypto will vanish without cementing some kind of role in our futures.
The CFD Solution
Increasingly, crypto-curious investors are realizing that it’s possible to gain exposure to this emerging market without taking on the risks of direct ownership. One way is to trade derivatives such as Contracts for Difference through a properly regulated company.
“If you’re trading through an exchange, you are subject to hacking risks, and there’s also a lot of admin,” said Oliver Imre, Head of IT and Operations at IG. “You'll typically need to set up a wallet, make decisions around cold wallets, hot wallets, storing private keys, passwords, making backups of your wallets, and so on. When you're trading CFDs, you're effectively outsourcing that security risk and admin to a company like IG.”
Trading CFDs also turns one of the major problems of direct ownership–exposure to volatility and downside risk–into an opportunity. CFDs enable buyers to go long and short to exploit any price movements, as well as protect themselves against volatility with stop and limit orders.
The crypto market is also diversifying, presenting investors with an opportunity to explore emerging crypto trends. Almost 90% of Bitcoin owners now hold “alt coins” as well[10]. While this is a sign of a strengthening market, it also leaves many investors with a kind of “shopper’s anxiety”–becoming paralyzed by choice in a market that’s become associated with short-term hype.
“The way we bring new products onto our platform is client-driven,” Algeo said. “We assess whether we can do that in a way that delivers competitive advantages and upholds the experience that they've come to expect from us. That’s how we’ve come to offer exposure to Polkadot, Uniswap and Dogecoin. And we responded to client demand for broader exposure to the top ten coins by offering a Crypto 10 index.
Risks remain, but while some mainstream investors still harbor doubts about the long-term viability of the crypto market, any asset class capable of reaching a $3 trillion market cap clearly has staying power. And, in fact, the larger the market becomes, the safer it will be for the retail investor.
“Cryptos were set up as an alternative to the existing financial infrastructure and regulatory frameworks, almost to counter them,” Algeo said. “But, increasingly, they've been working in parallel. As there's been further mainstream adoption, the peak $3 trillion market cap is becoming too big to ignore, and too big not to regulate. This growth will lead to sensible regulation and more consumer protection, which is a good thing.”