Aussies beware! Crypto CFDs will soon become useless

Table of Contents

• What type of restrictions to expect
• Why will the regulations be installed?
• Following ESMA’s footsteps

The Australian Securities and Investments Commission was given authority to delve into the Australian derivatives market as early as April 2019. However, there was no significant action taken during the months leading up to today, for which the ASIC was seriously criticized.

The reason behind the criticism is that exactly a month after the authority was granted, the crypto market entered yet another surge where we say Bitcoin reach as high as $13,000 at one point. The fact that the ASIC didn’t do anything made some lawmakers think if it was worth it to grant the authority in the first place.

However, now there are rumors that the regulator will implement their ESMA-like CFD regulations starting this November. Therefore, all of the Australian investors, registered with local CFD brokers can expect their leverage on crypto CFDs to completely tank. So much so that they can expect the activity becoming completely redundant.

What type of restrictions to expect

The first and main change that should be expected is the decrease of maximum leverage on CFD derivatives.

For commodities like Gold and valuable metals, it will be 1:10 and for cryptocurrency pairs, it will be 1:2.

For those who don’t know what leverage is, it’s basically like borrowing money from your financial service provider or broker for short in order to increase your trade size.

For example, if you enter a trade with $100 and the leverage is 1:10, you get to trade with $1000 instead, thus generating a lot more profit if your trade was successful, but losing much much more if it was unsuccessful.

The second change will be the prohibition of any and all kinds of binary options, as it is also an industry primarily designed to go against the user’s trade. Meaning that it’s in the broker’s interest for the trader to be wrong, thus introducing the danger of fixing trades.

Why will the regulations be installed?

The ASIC failed to supply relevant arguments to the Australian parliament as to why it needs to install relevant regulations, but the idea is pretty obvious.

CFDs are one of the, if not the riskiest assets to invest in the current market reality. The whole thing about CFDs is that they’re not the actual assets they represent. For example, when you buy $9500 worth of Bitcoin CFDs, it doesn’t mean that you now own 1 BTC. It means that you own a contract specifying that you bought BTC at this point in price. It has a specific deadline before it is sold off regardless if you’re going to lose on the investment or not.

With a volatile market like cryptocurrencies, it’s basically like risk squared, and leads to thousands of investors losing billions of dollars on it every year. But, the opportunity to make a quick buck just forces them to come back every month.

Therefore, by restricting the leverage to just 1:2, it will convince investors to go for actual assets rather than CFDs. The advantage of actual assets is that the person can simply hold onto them if the prices decrease too much. They’re not forced to sell at any given moment.

Imagine how most people sat out the crypto winter. All they did was keep their cryptos stationed on their cold or hot wallets and didn’t touch them until prices moved significantly.

Following ESMA’s footsteps

The main example that the ASIC is using right now is the European Securities and Markets Authority (ESMA), that introduced an identical regulation in 2016.

Every broker was forced to reduce the leverage they offered on CFD derivatives and completely remove any and all binary options services.

According to data gathered in the last 3 years by ESMA, the regulations seem to have worked. Sure most of the CFD brokers almost went bankrupt, but the number of lost funds in the financial markets decreased significantly.

That will be the main goal for ASIC as well, and it should be met with cheers by the Australian crypto community, as this regulation will funnel past CFD traders into crypto exchanges, thus increasing the volume of multiple altcoins and their overall prices in the near future.

The repetition of the 2017 market boom could be upon us in the coming two months.