The demand for crypto CFD trading

In traditional trading, Contracts for Difference (CFD) allow to reduce exposure to fees, regulation, commissions and high capital requirements. While in cryptocurrencies such as Ethereum some of these overheads are negligible (e.g. Ether can be minted, and the regulatory framework is still in flux), and although CFDs are not generally considered suitable for buy-and-hold trading or long-term positions (large intra-day differences in spreads can be really damaging), studying the demand trends for ETH CFDs can help understanding the evolving risk tolerance of the market towards Ethereum.

A demand index (January 1st represents 100%) for a popular online CFD vendor is shown. The vendor offers multiple products, including indexes, stocks and cryptocurrencies. By inspecting the signal it is apparent that there is seasonality (weekends have less activity), but it appears as well that there is a trend building up with increasingly higher activity on weekends (cryptocurrency markets trade on a 24/7 schedule).  
 

 Off-chain CDF demand index

Off-chain CDF demand index

 

When we separate the components of the signal, both the seasonality and the trend become evident: the uptrend matches the rally in cryptocurrencies that started in May 2017, while the highest peak in the residuals aligns with the highest peak in marketcap to that date, June 12-13.   

 Decomposition of Off-chain CDF demand signal

Decomposition of Off-chain CDF demand signal

 
 Combined marketcap of all listed tokens during the May-June 2017 rally. Source: Coinmarketcap

Combined marketcap of all listed tokens during the May-June 2017 rally. Source: Coinmarketcap

 

But how to identify the influence of Ethereum, specifically, among the demand for CFDs for other cryptos and products? By disaggregating the signals to isolate the contribution of Ethereum-specific requests, it is possible to identify how an increase of interest (March-April) precedes the rally (May-June).  

 Off-chain CDF, Ethereum share of demand

Off-chain CDF, Ethereum share of demand

 

So far we have analyzed the investment products for mainstream investors that are available on the web (off chain provider). As of August 2017 there were also a few on-chain CFD providers in development, and one in Beta phase, for which a demand index is shown below. Demand for this product (which is itself running on a smart contract on the Ethereum blockchain) is until now decoupled from the cryptos market- but in the future this signal will probably gain predictive strength, specially among investors that are more familiar with blockchain technology and who are looking for alternatives that are less centralized. 

on-chain CFD.png

On-chain CDF demand index