If you thought the Bitcoin market was crazy before, just wait until traders get the ability to make leveraged bets on the virtual currency’s future price. From the what-could-possibly-go-wrong department, TechCrunch reports that New York-based startup Coinsetter has received $500,000 in seed funding to set up a Bitcoin trading platform that will allow for high-risk margin trades and short selling of Bitcoins. Coinsetter co-founder Jaron Lukasiewicz tells TechCrunch that the ability to make leveraged trades is vital to every major financial market and that giving owners the ability to trade Bitcoins in this way will help the virtual currency establish itself as a legitimate alternative to government-issued money.
Margin trades, for those who aren’t up on finance terminology, involve borrowing money from an outside source to buy an asset. The advantage of margin trades is that you can potentially reap larger rewards if an asset’s value increases because you’ll be able to buy more of the asset using someone else’s money. The downside of margin trades, of course, is that if the value of the asset goes south then you won’t only lose the money you invested but you’ll still have to pay back the party you borrowed money from along with interest.
Adding margin trades to the Bitcoin market will certainly be interesting since it will potentially be adding a lot more leverage to a market that many investors already believe is a bubble. Let’s put it this way: If someone offers to sell you synthetic Bitcoin swaps over the next few months, you probably shouldn’t take them up on it unless you have a lot of spare cash to blow.