How Bitcoin Spread Betting Works

By
Craig Anthony
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Craig Anthony, CFA, is the founder and CEO of the Craig Anthony Group LLC. He is also an Investopedia contributor and published author.
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Updated March 16, 2024
Reviewed by
Erika Rasure
erika
Reviewed by Erika Rasure
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Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

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A trading strategy called spread betting is a tax-efficient way to use financial derivatives to speculate on the price movements of a variety of financial instruments. Spread betting is illegal in the United States, Japan, Canada, and parts of Europe, but it is legal in the United Kingdom and other parts of Europe, where there is a very active market. Below is a description of Bitcoin spread betting, its advantages, and an example of a trade.

Key Takeaways

  • A trading strategy called spread betting is a tax-efficient way to use financial derivatives to speculate on the price movements of a variety of financial instruments.
  • Spread betting is illegal in the U.S. but legal in the U.K. and other parts of Europe.
  • With a Bitcoin spread bet, a trader makes a decision on whether they think the price of the cryptocurrency may go up or down and makes a profit or loss based on whether this prediction is correct.

How Does Bitcoin Spread Betting Work?

Spread betting is a strategy that allows traders to bet on the direction of a security or financial market without an ownership stake. Put simply, spread betting involves speculating on whether an asset's price will rise or fall. The practice is illegal in the U.S. and many other countries because it can result in large losses.

However, traders can use spread betting as a strategy in the United Kingdom on Bitcoin. With a Bitcoin spread bet, a trader makes a decision on whether they think the price of the currency may go up or down and makes a profit or loss based on whether their prediction is correct. The greater the price movement, the greater the profit or loss the trader can realize once the trade is closed.

It is important to note that actual Bitcoin is never directly purchased or sold. Rather, the spread bet is made by using a derivative contract. This means:

  • If a person believes that the price will increase, they must open a long position (buy) in the spread bet
  • If they speculate that the price will decrease, they should open a short position (sell) in the spread bet

What's at Stake in a Bitcoin Spread Bet?

The money the trader puts on the line for a specified amount of price movement is known as the spread bet's stake. For every point Bitcoin moves, the trader gains or loses multiples of this amount relative to the number of points the currency moves.

Like all spread betting, a Bitcoin spread bet is a leveraged trade. Only a small percentage of the total value of the trade needs to be deposited to enter the trade. Gains and losses are both magnified. Potential profits may be large, but potential losses may exceed the dollar value of the trader's account, requiring further deposits to cover losses.

Bitcoin is a digital currency created in 2009 as a decentralized payment method. It offers users a high degree of anonymity because personal information is not required to use it. All balances are digital and are maintained through a computerized and encrypted public ledger.

Benefits of Spread Betting

Traders interested in spread betting Bitcoin never need to actually own the cryptocurrency. This means they don't need to deal with any Bitcoin exchanges or obtain a Bitcoin wallet, which is required for those looking to own it. Both obtaining a wallet and engaging with Bitcoin exchanges have their own unique risks, and spread betting eliminates them directly.

Bitcoin spread betting in the United Kingdom is classified as gambling, which is tax-free in the country. Taxes on the profits made by Bitcoin spread betting may exist for international investors, so it is advisable to consult with a tax professional when engaging in spread betting.

Traders can make spread bets directly on the price of Bitcoin, but they may also place spread bets on Bitcoin currency pairs. This adds another dimension to the bets. The commonly used Bitcoin currency code is XBT. Spread bets can be placed on the following Bitcoin currency pairs:

  • XBT/GBP
  • XBT/USD
  • XBT/EUR
  • XBT/JPY
  • XBT/CNH

These trades can be placed 24 hours a day.

Steps in Bitcoin Spread Betting

If you're in a country that allows spread betting, you can follow these six steps to conduct Bitcoin spread trade:

  1. Find a spread betting platform
  2. Look at the current Bitcoin bid/ask spread
  3. Speculate on a price movement direction
  4. Calculate the stake of the trader per price movement
  5. Close the trade
  6. Calculate the profit or loss

Example of Bitcoin Spread Betting

Imagine you want to place a Bitcoin spread bet. Bitcoin is a leveraged trade, and a €1 bet per point equates to betting on 100 XBT. Assume that Bitcoin is trading in the spot market at €600. You might see the bid price listed as €59,850 and the asking price listed as €60,150.

You speculate that the price will increase and decide to take a long on the spread bet. You stake €5 on each point of price movement. After some time passes, the new ask price of Bitcoin is €62,150 (a 2,000 point increase). You close out the trade and calculate its profit. In generalized terms for a long position, the profit and loss are:

Profit or Loss = (Settlement Price - Opening Price) x Stake

In the above trade example, the profit the trader earns is:

(€62,150 - €60,150) x €5 = €10,000

This means you've earned a profit of €10,000 with your Bitcoin spread betting.

Why Is Spread Betting Illegal in the United States?

Traders aren't allowed to engage in spread betting in the United States because of the country's complex financial market regulations. This regulation also helps prevent traders from using speculation (gambling) that could lead to major losses.

Where Is Spread Betting Legal?

Spread betting is a legal trading strategy in the United Kingdom and other parts of the world. However, it is illegal in the United States because it can lead to significant losses.

How Do You Trade Bitcoin?

If you're interested in trading Bitcoin, you must first open an account on an exchange and fund it. Most exchanges provide a wallet for your keys, but you can choose any wallet you want. Once this is done, you can begin trading by opening your first position in Bitcoin.

The Bottom Line

Some people consider spread betting to be a form of gambling. That's because it involves speculation and multiplies gains and losses. Traders can engage in spread betting in the U.K. and several other countries using any number of online platforms, but it is illegal in the United States.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.

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