Synthetic indices are financial instruments that mimic or imitate the behaviour and movement of real-world indices. However, issues like global events do not affect the synthetic indices because they are created by synthesising the price movement with a random number generator. This means that the indices have constant volatility and are free from liquidity. On the other hand, crypto is a form of currency that exists digitally and whose ledger is maintained by cryptographical encryptions. Unlike other currencies that are regulated by the government and financial institutions, crypto is decentralized meaning it has no organization controlling it.
There are various reasons why synthetic indices are similar to crypto. One of the similarities is that these assets are both available for trading on broker sites. There are many crypto brokers as well as brokers with synthetic indices in the market. This article will look at the similarities between synthetic indices and crypto.
Both Exist Digitally
Synthetic indices are issued by tracking the movements of indices using mathematical equations. They are issued and maintained by a computer system that automates the process. On the other hand, cryptocurrencies are digital currencies that run on a blockchain system of computers that maintain the ledger using cryptographical encryptions. This is one of the major similarities between cryptocurrencies and synthetic indices.
However, cryptocurrencies run on a decentralised network of computers from around the world. On the other hand, synthetic indices are maintained and controlled by a centralised computer system leaving them open to manipulation.
Leverage
Leverage is one of the factors that makes synthetic indices similar to crypto. Both of these asset classes are leveraged allowing clients to control large positions in the market. When it comes to synthetic indices traders can access leverage and relatively tight spreads. This is similar to what traders get when trading cryptocurrencies.
While leverage offers traders an opportunity to earn potentially higher profits, it also exposes them to higher potential losses. It is a double-edged sword that should be used sparingly and wisely to work to the advantage of traders.
Both are Available For CFD Trading
CFDs allow clients to speculate on the price of an asset without owning the underlying asset. There are many brokers that offer CFDs on both synthetic indices and cryptocurrencies. These CFDs allow traders to speculate on price without the need to own the underlying asset. The main advantage of CFDs is it allows traders to speculate on an asset’s price at a lower price. Moreover, clients can go both long and short on the price of an asset.
However, note that CFD trading is very risky and a majority of investor accounts lose money when trading. On some broker sites, over 70% of CFD traders end up losing their funds.
Volatility
Volatility is the rate of price changes for a given asset. Both the crypto market and the synthetic indices market are very volatile and prices can shift at any time. Although they are different it’s still a factor that makes them similar. The volatility of these markets means it’s hard to predict their movement within a given time.
While volatility is risky, it can be utilised to a trader’s advantage. Traders use trading strategies such as stop losses and take profits to minimize losses and lock in profits respectively.
Both Can be Traded as Binary Options
Both synthetic indices and cryptocurrencies can be traded as binary options. This means that the payout depends on the outcome of a yes or no proposition and whether the price of either synthetic indices or crypto will rise or fall below a specific amount. Trading binary options is also very risky and a place where a majority of the trading accounts lose their money. Remember with binary options, you either get a monetary payout or nothing at all.
Both can be traded using a broker
Most trading of cryptocurrency assets happens on exchanges, both centralised and decentralised. On the other hand, indices are mostly traded on different broker sites. Luckily, cryptocurrencies are also available to trade on broker sites. This opens up access to these markets to global clients as long as the broker accepts clients from a trader’s country.
Trading Times
The last reason in our piece on why synthetic indices are similar to crypto is the trading times. Both synthetic indices and crypto can be traded 24/7. These assets are available to trade throughout which means traders can diversify their portfolios using these asset classes when other classes like forex are closed.
This is especially useful on weekends. When most markets are closed, traders can still try to earn a profit and participate in financial markets by trading cryptocurrencies and synthetic indices.
Closing remarks
Synthetic indices and crypto have a lot of similarities as we have seen in this article. However, these are two different markets that should not be confused with each other. They are both very volatile, presenting an inherent risk to trading the different assets. Understanding how both these markets work, considering both their similarities and differences is key to potential success.
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