Date:
28th Aug 2020
Author:
CryptoGT
What are Synthetic Crypto Pairs?
Till very recently, synthetic forex pairs have been traded by financial institutions, to deal with currency pairs that do not have sufficient liquidity to execute high volume orders. So, if a trader wishes to trade GBP/NZD, the workaround here would be placing two separate trades, one where you buy the USD in exchange for GBP and the other where you purchase NZD for USD. Both GBP/USD and NZD/USD are traded highly, given the US dollars high liquidity in the forex market.
Similarly, a large percentage of cryptocurrency trading is done with Bitcoin (BTC) as the base currency and trading it against prominent fiat currencies, like the USD and EUR, or other altcoins, like Ethereum (ETH) and Litecoin (LTC).
But, with the advent of margin trading and crypto derivatives platforms like CFDs (Contracts for Difference), it is now possible to trade synthetic crypto pairs. The correlations (or the lack of it) between BTC and other assets like gold (XAU) or indices like SPX (S&P 500) allows traders to use the BTC’s safe haven properties and hedge against market pullbacks. In times of economic uncertainty, traders often rotate out of high risk/reward assets.
Synthetic pairs have made it possible to take positions on pairs that do not exist to increase trading opportunities.
Similarly, a large percentage of cryptocurrency trading is done with Bitcoin (BTC) as the base currency and trading it against prominent fiat currencies, like the USD and EUR, or other altcoins, like Ethereum (ETH) and Litecoin (LTC).
But, with the advent of margin trading and crypto derivatives platforms like CFDs (Contracts for Difference), it is now possible to trade synthetic crypto pairs. The correlations (or the lack of it) between BTC and other assets like gold (XAU) or indices like SPX (S&P 500) allows traders to use the BTC’s safe haven properties and hedge against market pullbacks. In times of economic uncertainty, traders often rotate out of high risk/reward assets.
Synthetic pairs have made it possible to take positions on pairs that do not exist to increase trading opportunities.
Understanding how major cryptocurrencies, like BTC, perform within the markets lets traders optimise portfolios in preparation of market downturns. Plus, by using CFDs, traders can take advantage of an overall bullish trend as well.
Taking the BTCSPX pair into consideration, it can be seen that money exiting the stock market has recently been invested either in BTC or gold. Although the S&P 500 has hit all-time highs and recovered losses from the coronavirus-led sell-off, more than 60% of the stocks were still recording losses as of August 22, 2020.
Technical analysts were apprehensive of the duo showing increasing positive correlation, which peaked to 66.2% on June 30, 2020. But, BTC has again disbanded from this correlation with SPX since the end ofJuly. Against downward pressure on the S&P 500 index, due to rising Covid-19 fears and failure of the US government to decide on a fiscal stimulus, BTC has risen and remained above the $11,000 mark since the beginning of August 2020.
Technical analysts were apprehensive of the duo showing increasing positive correlation, which peaked to 66.2% on June 30, 2020. But, BTC has again disbanded from this correlation with SPX since the end ofJuly. Against downward pressure on the S&P 500 index, due to rising Covid-19 fears and failure of the US government to decide on a fiscal stimulus, BTC has risen and remained above the $11,000 mark since the beginning of August 2020.
The correlation between BTC and XAU has been increasing, as gold broke the $1,900 mark at the end of July 2020, before pulling back to trade alongside BTC. According to data by CryptoCompare, BTC’s monthly correlation with gold was at 0.66 on July 31, 2020. Bitcoin’s positive correlation with gold is not only leading traders to expect further rise in BTC price, but also cementing its position as a safe-haven asset, against a backdrop of further government stimulus packages.
Similarly, using BTC, traders can take positions to hedge against economic uncertainties and volatility in other markets, like oil and other precious metals like silver.
Similarly, using BTC, traders can take positions to hedge against economic uncertainties and volatility in other markets, like oil and other precious metals like silver.
Suppose a trader wants to take a long position in BTCUSO (Bitcoin/United States Oil Exchange Traded Fund), they will have to open two simultaneous trades:
- Long position on the BTC/USD contract
- Short position on the USO/USD contract, worth the same USD size as the contract bought
Summarizing the benefits of trading synthetic crypto pairs through CFDs:
- Provides additional trading opportunities: Traders can remain market-neutral with a combination of long and short positions. This prevents a single directional exposure against the market. Crypto assets can be used to hedge against volatility in the fiat markets directly.
- Increased price efficiency in the market: Traders can take positions based on their chosen strategies. The combination of bullish and bearish views for a particular asset pair helps to maintain a fair price of the underlying asset, taking into account the available information possessed by all market participants. This is particularly helpful since prices of cryptocurrencies vary across different exchanges. CFD trading can help alleviate this variance.
- Returns can be realised in the settlement currency: Both profits and losses can be realised in a third currency, while traders speculate on the price change of two assets.
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Cryptocurrency trading can be extremely risky and can lead to large and immediate financial losses. Crypto assets are highly volatile and can result in significant losses of your capital over a short period of time. Cryptocurrencies markets are unregulated services which are not governed by any specific regulatory framework. The provision of such services is not being directly provided by the Company but through licensed third parties.
CryptoGT does not provide its services to residents of various jurisdictions such as but not limited to the United States of America, North Korea and Cuba.
CryptoGT currently accepts only cryptocurrencies as method of deposit.
Cryptocurrency trading can be extremely risky and can lead to large and immediate financial losses. Crypto assets are highly volatile and can result in significant losses of your capital over a short period of time. Cryptocurrencies markets are unregulated services which are not governed by any specific regulatory framework. The provision of such services is not being directly provided by the Company but through licensed third parties.
CryptoGT does not provide its services to residents of various jurisdictions such as but not limited to the United States of America, North Korea and Cuba.
CryptoGT currently accepts only cryptocurrencies as method of deposit.